Monitoring Compliance with the
Basel II Accord
Charles H. Le Grand
Reliability of Global Financial
Infrastructures, Information, and
Reporting
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Accountability
Standards
Measurement
Analysis
Basel II Accord
• “International Convergence of Capital
Measurement and Capital Standards:
A Revised Framework”
• Basel Committee on Banking
Supervision
• Bank for International Settlements,
Basel, Switzerland. (www.bis.org)
Basel II Accord Objectives
• International convergence on regulations governing
capital adequacy of internationally active banks
• Framework for measuring capital adequacy to
strengthen the soundness and stability of the
international banking system
• Consistency so capital adequacy regulation will not
cause competitive inequality among international banks
• Adopt strong industry risk management practices
• Minimum standard for national supervisory authorities
• Maintain the aggregate level of minimum capital
requirements and provide incentives to adopt the
advanced risk-sensitive approaches of the revised
Framework
Three Pillar Approach
• Minimum Capital Requirements
• Supervisory Review
• Market Discipline
Pillar 1
• Calculation of Minimum Capital
Requirements considering
o Credit Risk
o Operational Risk
o Market Risk
Pillar 2 – Supervisory Review of
Capital Adequacy – Four Key
Principles
1.Banks’ process for assessing their overall
capital in relation to their risk profile, and
Strategy for maintaining their capital levels
Pillar 2 – Supervisory Review of
Capital Adequacy – Four Key
Principles
2. Review & evaluate banks’ internal capital
adequacy assessments and strategies, as well as
their ability to monitor and ensure compliance with
regulatory capital ratios.
Take appropriate supervisory action if not satisfied
with the results of this process.
Pillar 2 – Supervisory Review of
Capital Adequacy – Four Key
Principles
3. Expect banks to operate above the
minimum regulatory capital ratios, and
Require banks to hold capital in excess of
the minimum.
Pillar 2 – Supervisory Review of
Capital Adequacy – Four Key
Principles
4. Supervisor intervention at an early stage
to keep capital at or above the minimum
levels for the risk characteristics of a
particular bank and
Require a rapid remedy if capital is not
maintained or restored
Pillar 3 – Market Discipline
through Enhanced Public
Disclosure
• The disclosures provided under the third
pillar of this Framework will be essential
Ensuring market discipline is an effective
complement to the other two pillars.
Critical Infrastructure
Protection (CIP)
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Financial Systems
Energy
Communications
Transportation
Technology
Food and Water
Waste Management
Government
Law Enforcement
Peacekeeping
Emergency Management and Response
Compliance Cultures
• Compliance Administrative Overhead
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Cost / benefit of regulatory requirements (who?)
Impacts on management time and opportunities
Impacts on competition – smaller banks
Aversion to prescriptive regulations
Role of politics in regulation and supervision
Opportunity to base compliance on measures
that are also relevant to management
Operational and Other Risk
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System and communication failures
Systemic risks (cascading across organizations)
eFraud – internal and external
System integrations (as from mergers) and
conversions – and the roles of testing
• Targeted attacks on institutions and/or
infrastructures
• Purchasing and providing services
• The role of “innovation” and new risk instruments
Supervisor and Convergence
Roles
• Learning from the current global financial
situation
• Cultural change to position regulation and
supervision as a benefit not a burden
• Reduce incentives to game the system
• Monitoring and analytics intelligent enough
to spot dangerous schemes before they
become the next catastrophe
Contact
Charles H. Le Grand, CHL Global Associates
206 Sweetwater Blvd So., Longwood, FL 32779
407-830-1040 office
407-830-1020 home
321-287-8020 mobile
407-413-9192 Skype clegrand1
www.CHLGlobalAssociates.com
clegrand@cfl.rr.com
TechPar Group - www.techpargroup.com
clegrand@techpargroup.com