- Outlines the calculation of minimum capital requirements through credit, operational, and market risk and the implementation considerations thereof
- Requires a process, reviewed and evaluated by supervisors, for assessing overall capital adequacy in relation to risk profile, a strategy for maintaining capital levels above the minimum, and supervisors to intervene at an early stage to maintain above minimum capital adequacy
- Provides a set of disclosure requirements which will allow market participants to access and assess information on the capital, risk exposures, and risk assessment processes, and therefore, the capital adequacy of the financial institution
Basel II is the second set of recommendations from the Basel Committee on Banking Supervision, an entity that seeks to create an international standard on regulating how much capital financial institutions need to reserve in order to protect against its investment and operational risks. The three basic pillars of the Basel II standards are minimum capital requirements, supervisory review process, and market disclosure. Basel II is designed with requirements that necessitate that the greater the bank´s risk exposure, the more reserve capital the bank must maintain in order to ensure economic stability. The purpose of these standards is to provide a framework to minimize the risk facing the international financial system due to the failure and collapse of a single vital bank or series of banks.
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