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Basel II
Compliance Regulation and Standard Requirements
Basel II
is an international business standard that requires financial institutions
to maintain enough cash reserves to cover risks incurred by
operations. The
Basel accords are a series of recommendations on banking laws and
regulations issued by the Basel Committee on Banking Supervision
(BSBS).
The name for the accords is derived from Basel, Switzerland, where
the committee that maintains the accords meets.
Basel II improved on Basel I, first enacted in the 1980s, by offering
more
complex models for calculating regulatory capital. Essentially, the
accord
mandates that banks holding riskier assets should be required to have
more
capital on hand than those maintaining safer portfolios. Basel II also
requires
companies to publish both the details of risky investments and risk
management practices.
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The International Convergence of Capital Measurement and Capital
Standards - A Revised Framework.
The three essential requirements of Basel II are:
1. Mandating that capital allocations by institutional managers are
more risk sensitive.
2. Separating credit risks from operational risks and quantifying
both.
3. Reducing the scope or possibility of regulatory arbitrage by
attempting to align the real or economic risk precisely with
regulatory assessment.
Basel II has resulted in the evolution of a number of strategies to allow
banks
to make risky investments, such as the subprime mortgage market.
Higher
risks assets are moved to unregulated parts of holding companies.
Alternatively, the risk can be transferred directly to investors by
securitization, the process of taking a non-liquid asset or groups of
assets and transforming them into a security that can be traded on open
markets.
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How important are Basel II requirements and
operational risk?
So how important are Basel II requirements now, especially
given the
condition of today's banks? Considering the state of today's
financial
institutions, some experts say the need for Basel II may be
stronger than
ever. Although Basel II requirements deal with a range of
threats,
including market and credit risk, it's Basel II operational risk
that will
most interest and affect information security professionals.
Developing a governance, risk and compliance
management strategy to achieve compliance with Basel
II requirements
Governance, risk and compliance (GRC) management is an
integrated
approach, not one that necessarily separates a bank's Basel II
operational
risk, for example, from its legal or market risk. As contributor
Michael
Rasmussen said, GRC is about organizational collaboration.
This kind of "federated" GRC initiative involves a number of
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professional roles. Building your Basel II compliance roadmap
means
defining your scope and creating an accurate inventory of
systems and processes.
Developing a Basel II risk management and reporting
strategy
Basel II operational risk is defined as the risk of loss resulting
from inadequate or failed internal processes, people and
systems, or from outside events. What does that mean exactly?
The financial regulation, created by the Basel Committee on
Banking Supervision, acknowledges that how operational risk is
defined can make or break financial institutions, especially
given banks' increased reliance on information systems and
complex financial instruments.
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