Amore Comprehensive Approach to Capital Regulation

The new Basel Capital Accord, known as Basel II, represents a much more comprehensive approach to capital regulation than Basel I. This means that calculating a minimum amount of capital becomes an integrated part of the supervisory process and the subject of an ongoing dialogue between bank and supervisor. Whereas most banks are focussed on pillar 1 of Basel II, they tend to neglect requirements stemming from pillar 2 and pillar 3 of the new accord. This paper gives some insights to the ideas behind the new requirements of Basel II. If a bank is compliant with its full capital requirements this will also be a statement about the quality of its risk management skills, its overall capital adequacy assessment process and its disclosures.