The New Basel Accord: Implementation Perspectives

While Basel I issued in 1988 emphasized mainly on the capital adequacy norms required to be followed by the banks to avoid bankruptcy. Basel II brought about significant changes in the following areas: Capital Adequacy. Banking Supervision and Market Discipline. These three are popularly referred to as three pillars of the new accord. The second accord imposes equal importance on all the three. The Basel committee stresses the need for stringent adherence to all the three pillars to ensure safety and soundness of the financial system. The revision lays emphasis on improvements in the measurement of risks, particularly credit risk, market risk and operational risk. It is the committee’s belief that the new accord will enhance the soundness of financial system by way of relating the mandatory capital requirement to the underlying risks in the banking business and by encouraging better risk management by banks, and enhanced market discipline. The major advantage of the new accord is that it provides adequate flexibility for the banks. It explains in detail the various risk measurement techniques. Many financial institutions, including central banks of different countries, have expressed their views on the new accord and the consultative paper issued in the regard. Though the accord itself took into consideration views from different central banks, the committee has invited opinions on the accord from several interested parties to make the required amendments before the actual implementation.