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 sophsiticated banks and 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