Free Accounting Dissertations - Principle 1: Banks Should Have A Process For Assessing Their Overall Capital
Principle 1: Banks should have a process for assessing their overall capital adequacy in relation to their risk profile and a strategy for maintaining their capital levels.
Principle 2: Supervisors should review and evaluate banks’ internal capital adequacy assessments and strategies, as well as their ability to monitor and ensure their compliance with regulatory capital ratios. Supervisors should take appropriate supervisory action if they are not satisfied with the result of this process.
Principle 3: Supervisors should expect banks to operate above the minimum regulatory capital ratios and should have the ability to require banks to hold capital in excess of the minimum.
Principle 4: Supervisors should seek to intervene at an early stage to prevent capital from falling below the minimum levels required to support the risk characteristics of a particular bank and should require rapid remedial action if capital is not maintained or restored.
2.3.3: Issues to be addressed
There are two specific issues to be addressed by the Supervisory-Review Process. They are
Interest Rate Risk in the Banking book:
Since it is clear that the Basel Committee’s primary focus is on identifying and preventing risk in the international banking, the committee has perceived that the interest rate risk in the banking book is a potential risk that commends support from the capital. The interest rate risk was initially identified as a potential risk under pillar one of the accord but after through analysis of the internationally active banks and having perceived the heterogeneity among them, the committee has considered the interest rate risk in the banking book under pillar 2.
Credit Risk:
The Basel II Accord considers credit risk to be addressed by the supervisory review process in order to monitor the credit risk and the implications on the regulatory capital of the bank. The four different approaches listed by the Basel Committee are listed below.
Stress tests Under the IRB approaches
Definition of Default
Residual Risk and
Credit Concentration risk
The aforementioned are not explained in detail due the word limit restrictions of this report. The Basel II Accord provides a clear description.
Operational Risks:
The Basel I Accord also expects the supervisory process to monitor and review the operational risk associated with the bank. This is obviously because of the fact that the gross income used is a proxy for the scale of operational risk exposure of a bank and in some cases can underestimate the need for capital for operational risk. Thus the Basel Committee has ensured that the operational risk is under the supervisory process in order to establish a balance between the operational risk and the capital employed by the banks.
2.3.4: Supervisory Process for Securitisation
Furthermore the supervisory process is applied for the Securitisation under the pillar 1 of the accord.
