Basel II is a set of international banking regulations that were developed by the Basel Committee on Banking Supervision, a group of central banks and financial regulators from around the world. The Basel II norms were introduced in 2004 and updated the Basel I regulations that were introduced in 1988.
The key features of the Basel II norms are:
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Minimum capital requirements: Banks are required to maintain a minimum level of capital based on the risk-weighted assets of the bank. The risk-weighted assets are calculated by assigning a risk weight to each type of asset on the bank’s balance sheet.
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Three pillars approach: The Basel II norms are based on a three-pillar approach, which includes minimum capital requirements, supervisory review, and market discipline.
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Supervisory review: Banks are required to undergo a regular supervisory review by the banking regulator to assess the adequacy of their capital, risk management processes, and internal controls.
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Market discipline: Banks are required to provide more information about their risk management practices and capital levels to the public, to improve market discipline and promote transparency.
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Risk management: Banks are required to have robust risk management processes in place, including the identification, measurement, and management of various types of risks, such as credit risk, market risk, and operational risk.
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Credit risk management: Banks are required to use more sophisticated methods to assess and manage credit risk, including the use of credit rating agencies, internal ratings, and portfolio risk models.
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Operational risk management: Banks are required to have a framework in place to identify, measure, and manage operational risk, which includes risks associated with people, systems, and processes.
The Basel II norms have been implemented in many countries around the world and have been instrumental in promoting sound risk management practices among banks. However, the global financial crisis of 2008 exposed some weaknesses in the Basel II framework, leading to the development of Basel III norms, which further strengthened the regulatory framework for banks.
