The 3 Pillars of Basel II

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Basel II is one of the most important components of best practices in financial institutions and banks. The main objectives of compliance with Basel II are to regulate agency and custody services, retail banking, asset management, commercial banking, corporate finance, trading and sales as well as brokerage.

To understand the compliance solution framework we need to put some light on the three pillars of Basel II.

1st Pillar: Capital Required

In order to protect against risks, any financial institution including banks must have a minimum percentage of capital saved for risk management. This is an important best practice which improves the methods used in risk measurement. It focuses on:

  • Credit Risk
  • Operational Risk
  • IT implementation

2nd Pillar: Review Process

As best practices management in banks are required to develop coordination processes to support and improve the internal capital assessment process. Basel II does not allow banks and financial institutions to target attaining capitals which are likely to lead to particular risks and depose the risk controls. To ensure compliance, risk management and best practices the following are required:

  • An internal process which permits supervision, reviews and intervention by regulatory bodies
  • There must be sufficient insight into risk management infrastructures

3rd Pillar: Regulation of Market

As banks continue to adopt newer and advance approaches toward achieving best practices, there are some requirements which need to be met. These needs are terms of frequency and extent of report formats for availability of information. The two requirements are:

  • Separation of systems, groups and processes based on functionality.
  • Availability of an integrated reporting system to satisfy requirements of regulating discipline in the market.
  • Accessibility to data for users in separate systems or groups and processes.

Risk management is very crucial for success in maintaining a stable position in banking. For best practices banks and other financial institutions must comply with the three pillars of Basel II.

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