Basel 2 Accord

Overview


The Basel 2 accord was developed in June 2004 and created to supercede the First Basel accord.

First Pillar - Minimum Capital Requirements


The first pillar of Basel 2 seeks to establish a set of requirements for the capital requirements of a bank. Capital functions as a cushion against risk. Basel 2 identified 3 types of risk.

  • Credit Risk
    Under Basel, a bank may calculate credit risk in any of three ways. The committee sought to give a simple framework for banks to calculate credit risk, yet give more sophisticated banks a way to utilize their own internal models. This led them to the three method framework.
    • Standardized Approach
    • Internal Ratings Based
      • Foundation IRB
      • Advanced IRB
  • Market Risk
    Market risk was not changed from the 1996 amendment.
  • Operational Risk
    The basel framework provides two possible approaches to measuring operational risk.
    • Basic Indicator Approach
    • Advanced Measurement