Basel II

Compared to the first Basel (1988), innovations boil down to the following:

• creation of a risk-sensitive system for the weighted calculation of regulatory capital , based, if possible, on quantitative risk assessments carried out by the banks themselves;
• wider recognition of credit risk mitigation tools;
• new capital requirements for operational risk ;
• expanding the role of supervisors;
• comprehensive disclosure of information and methodology by banks.

Basel II is structurally divided into three parts - three components:

I. Calculation of minimum capital requirements - represents the calculation of the total minimum capital requirements for credit, market and operational risks. The ratio of capital to assets is calculated using the definition of regulatory capital and risk-weighted assets. The ratio of total capital to assets should not be lower than 8%. The capital of the second level should not exceed 100% of the capital of the first level .

II. The second component is the supervisory process . This section discusses the basic principles of the supervisory process, risk management, and transparency of reporting to banking supervisors developed by the Committee as applied to banking risks, including proposals regarding, inter alia, the interpretation of interest rate risk in the banking portfolio, credit risk (stress testing , definition of default, residual risk and risk of concentration of loans), operational risk , the growth of cross-border relations and interaction, as well as securitization .

III. The third component is market discipline . The objective of the third component - “Market discipline” - supplements the minimum capital requirements (Component 1) and the supervisory process (Component 2). The Committee seeks to stimulate market discipline by developing a set of disclosure requirements that will allow market participants to evaluate basic data on the scope, capital, risk exposure, risk assessment processes and, therefore, the capital adequacy of the institution. The Committee believes that such disclosure is of particular relevance in the light of the Agreement, according to which reliance on intra-bank methodologies gives banks greater freedom of action when assessing capital requirements.

In principle, disclosure by banks should be consistent with how senior management and the board of directors assess and manage bank risks. In accordance with the first component, banks apply specific approaches / methodologies for measuring the risks to which they are exposed, and the capital requirements arising from this. The Committee believes that data disclosure based on this common approach is an effective means of informing the market about banking risks and provides a mechanism for consistent and understandable disclosure of information, allowing more efficient comparison of various institutions.

Minimum capital requirements

The first component is devoted directly to methods for calculating credit risk and offers two approaches to calculating credit risk.

1. The standardized approach is based on weighing the amount of credit requirements by a coefficient assigned to one or another borrower depending on the external credit rating, i.e. the rating determined by one or another international rating agency ( Standard & Poor's , Moody's , Fitch Ratings , etc.). Compared with Basel I, the innovation is the orientation in assessing risk to external ratings as one of the most objective indicators of the activity of a bank (enterprise). Also new is a more flexible system for accounting for collateral when calculating credit risk.
2. The Internal Rated Based Approach Approach - IRB Approach . In terms of measuring credit risk, the IRB approach is a mathematical model that takes into account four factors: the probability of default of a counterparty (PD); counterparty default loss share (LGD); the absolute value of claims at the time of default (EAD) and the remaining effective term of the loan or circulation of a debt security (M). Using these indicators, the so-called expected (EL) and unexpected (UL) losses are determined, the value of which is included in the calculation of capital adequacy.

It was expected that the introduction of Basel II:

• will have the most significant effect on a sharp improvement in the quality of risk management in most banks. In addition to introducing a more risk-sensitive assessment of credit risks, many of them for the first time will begin to pay increased attention to operational risk - one of the main risks of commercial banks (along with credit, liquidity and market);
• will have the greatest impact on medium and small financial institutions in developed markets (including most European banks), as well as on most emerging markets and developing countries.

However, practice has shown that the implementation of Basel II standards is much more likely to provoke a slowdown in the economy and brings stagnation of industries closer.

• TSB RF. On the New Basel Committee on Banking Supervision Capital Adequacy
• Automated Operational Risk Management System