Basel II
Basel II is an international regulatory framework designed to improve the stability and soundness of the banking system by strengthening risk management practices. It was introduced by the Basel Committee on Banking Supervision in 2004 and is an updated version of the original Basel Accord, which was implemented in 1988.
One of the key features of Basel II is the requirement for banks to hold sufficient capital to cover their risks. Under the framework, banks are required to use a standardized approach or an internal models-based approach to calculate their regulatory capital requirements. The standardized approach sets out specific risk weights for different types of assets, while the internal models-based approach allows banks to use their own models to calculate their capital requirements.
Basel II also introduces more advanced risk management techniques, including the use of stress testing and scenario analysis to assess a bank’s vulnerability to adverse economic conditions. The framework also encourages banks to develop more sophisticated risk management systems and to improve their disclosure and transparency.
Overall, Basel II represents a significant improvement over the original Basel Accord, as it takes a more comprehensive and forward-looking approach to risk management. However, it has also been criticized for being overly complex and for encouraging banks to rely too heavily on internal models, which may not always accurately reflect the true level of risk.
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