Free Accounting Dissertations - Also, When A Bank Agrees To Use A More Sophisticated Method, It Cannot Revert
Also, when a bank agrees to use a more sophisticated method, it cannot revert back to the easier method without approval from the supervisor. This eventually increases the burden on the banks to choose a sophisticated method.
2.4.6: Trading Book Issues
The final segment of the first pillar is the trading book.
Basel Committee defines the trading book as a container of both the financial instruments and commodities held either with trading intent or in order to hedge other elements of the trading book. The trading book forms a vital element for the bank since it is the record of the bank’s financial instruments as well as commodities.
The Basel II Accord identifies four key principles for the supervisory process. They are listed below.
The basic requirements for the eligibility to trading book capital treatment put forth by the Basel II Accord are as follows
Clearly documented trading strategy for the position/instrument or portfolios, approved by senior management (which would include expected holding horizon).
Clearly defined policies and procedures for the active management of the position
Clearly defined policy and procedures to monitor the positions against the bank’s trading strategy including the monitoring of turnover and stale positions in the bank’s trading book
2.3: The Second Pillar- Supervisory Review Process
Basel committee was initially set up for the supervising the internationally active banks and produce a common platform for the smooth transactions and cross border finance. The Basel II Accord has established Supervisory Process as one of the three pillars in order to emphasise its stand on supervisory process.
The importance of supervisory process is described below.
2.3.1: Importance of Supervisory Process
The supervisory review process of the Basel II Accord aims not only to ensure that banks have adequate capital to support all the risks in their business but also intends to encourage the banks to develop and use better risk management techniques in monitoring and managing risks. Alongside, the supervisory process by developing internal capital assessment process and setting capital targets that are commensurate with the bank’s risk profile recognises the importance for bank management in order to improve the atmosphere in the international banking and cross border finance.
The Supervisory process evaluates the relationship between the amount of capital held by the bank against the risk, strength and effectiveness of the bank’s risk management eventually guiding the bank and supervising its activities in order to improve the performance of the banks in the international business market and cross border finance.
2.3.2 Four Key Principles of the supervisory review
The four key principles identified by the Basel II Accord on the supervisory process is listed below.
