The Basel Accord was established by the BCBS (Basel Committee on Banking Supervision) with an aim to regularize international banking standards. This accord features Basel I, II and Basel III which were gradually put in force to stabilize economies and control the flow of cash among international big banks.
Advocates who came up with the Basel II Accord firmly believe that it can protect international banks from being plunged into losses. On an international level, if a particular bank is forced to face huge losses due to some financial mishap in the market, it affects won’t be able to disturb the transactions taking place in other like banks. This can prove to be greatly helpful in retaining an economy’s monetary strength.
The Basel II accord is designed to fulfill the following objectives.
* To improve exposé requirements that can help investors get a better and clear idea of where their money is going to be invested and what should they expect in returns. The accord also focuses on the display of a company’s financial competence.
* Making sure that wealth distribution is less liable to hazards surrounding an economy.
* Assessing the risk involved in capital outlay, operational management and the markets making sure that they’re calculated in accordance to the provided numbers and prescribed methods.
* Getting rid of authoritarian arbitrage and introducing economic alignment along with capital regulations.
Basel II stands on three essential pillars that allow international banks to continue their work swiftly without becoming liable to huge financial downturns. This first pillar refers to attending to risk associated with capital. This means that the narrow resources should meet all the minimum requirements set by the Basel committee.
The 2nd pillar involves administrator review which means that supervisory bodies are given much more rights than they were issued in Basel I. This allocation of rights ensures that a country’s banks are following the accord procedures and are safe from potential economic damages.
Pillar number three requires banks to make necessary details common to the regulators and investors so that the discipline can be fairly maintained within the markets.
With risks out in the open, banks and contributors are fully aware of the risks that may or may not grapple their investments and transactions. This allows a safe financial environment to prosper and make indisputable profits.