Basel II Risk Management
From Virbus
Contents |
[edit] 1 Summary
“The Basel Accord is a credit risk framework introduced in 1988 with which the Basel Committee on Banking Supervision defined capital standards for international banks in member countries (G-10 countries).
[edit] 2 Why should you use it
The objective was to limit the banks’ business risks by way of banking supervision, thereby strengthening the financial system. In order to meet the requirements of ongoing developments in banking, the Basel Committee began revising these requirements in 1999 and the new capital accord (hence referred to as "Basel II") will go into effect in 2007. The requirements of the new accord, which was published in June 2004, serve to increase the stability of the international financial system by introducing more risk-sensitive minimum capital charges for exposures, expressly accounting for operational risks, reinforcing the role of financial market supervision and increasing market transparency.”
Although focused primarily on enhancing risk management in the banking sector, Basel I and Basel II have a major impact on all other industries as well because they contribute to determining the access of individual companies to external sources of financing. By requiring banks to assess the risk incorporated in business loans, the rules of Basel I and II directly affects the ability of companies operating in the tourism sector to finance their projects through bank loans.
[edit] 3 How does it work
Financial institutions have to rate the risk of a specific loan according to a basic model with respect to all the other credits in their portfolio. This is accomplished with the help of the so-called “three-pillar” model of Basel II.
“Banks are thus faced with the challenge of developing internal procedures and systems in order to ensure that they possess adequate capital resources in the long term with due attention to all material risks.”2 These bank specific procedures have been named ICAAP (Internal Capital Adequacy Assessment Process). In forming and defining its respective ICAAP, each individual bank is required to develop quantitative as well as qualitative indicators to asses the individual credit risk of its clients. Especially the pillar 1 requirements influence the credit possibilities and prices for the customers.
[edit] 4 Links and Sources
http://www.oenb.at/en/finanzm_stab/basel_II/basel_ii.jsp
http://www.oenb.at/en/finanzm_stab/basel_II/basel_ii.jsp