Second of the Basel Accords is known as a Basel II, Which are issued by the banking law and regulation by the Basel Committee on Banking Supervision. Basel II is initially published on June 2004, is to create an international standard that banking regulator use that to know how much capital bank need to security against the type of financial and operational risk bank faced. From the Basel II it believes that such this kind of international standard can help to guard international financial system and banks which are collapses. Basel II is accomplished for setting up rigorous risk and capital management is plan to ensure capital reserved is appropriate to the risk and bank exposed it to the landing and investment practise. This means to hold the safeguard its solvency and economic stability.
Basel II is based on three pillars concept:
Minimum capital requirement (deal with risk)
Supervisory review
Market discipline to promote the stability in financial system.
In addition entrepreneurs of such firm and author have some similar characteristic and preference which have interested many rechargers. Basel II is widely discussed source of financing in banks. There has been much debate on constraints faced in financing by Bank angels. This paper summarizes few of the articles covering these areas.
Review of Literature:
Basel II is a new capital adequacy system and this system is basically design for banking industry. To minimize credit and operational risk banks are using this new accord. In their research paper on the Practical aspect on implementing Basel II is basically explain that how this new economic framework the Basel II is implementing in the financial system. For this they gave one example of one of the leading financial bank in Netherland 'Rabo-bank' who chose Basel II and implementing this in their system. This bank has AAA rating and according to that, bank not has some financial aspect which author explains. In Basel I risk category explicit which implicit in Basel II. This approach will be use to measure feasible and possible, common risk parameters. This bank used it for its customer credit rating. So many critical factors arise during the implementing of Basel II. One of the major factors is Basel II capital adequacy system itself. In this accord rules and regulation is so complex then Basel I framework. IT system developer and risk model must be flexible using this approach. (Bert Bruggink and Eugen Buck, 2002)
This literature is base on Barclays Basel II preparation review by author, he involve Basel II system in Barclays. Barclay's wants to come out from some of the issue for that it adopt this new accord. In this he said that there was no matter with the business starting position, ultimate goal is the great deal of organisation. Basel II is has been evaluated to millennium bug. After so many hurdles and changes in the business system Barclay focus on some of the critical factor with using Basel II and which include capital, risk and program management. Major purpose of Basel II is to align regulatory capital assessment more closely with risk faced by the business. In this review there were critically examine some limitation to calculate risk factor, basically this literature covers understanding the firm's capital requirement, the main challenges in future, the advantages and disadvantages of using an internal ratings-based (IRB) approach. But Barclay has its own standard and maintaining it in the system is more accurate and it is higher then Basel II. In this case above all factors are deeply examined and lastly he said that Basel II preparation is a long way to go but still the next step is important. He said that we have to learn from pillar I and involve it in pillar II. (Mr. Ian Wilson, 2004)
In this literature author did vital research on risk base capital requirement and their impact on banking industry with Basel II. In this case she talked about the new capital framework is to encourage the use of inner regulation for calculating risk like credit as well as market and allocating capital. This case involving some major things like, survey of capital adequacy and requirement in banks and their limitation in this approach and next point contain why this capital adequacy is highly influencing to the bank after that she discuss on how to arise standard of bank with use of capital and at the end briefly discuss on Basel II and its application. In this case the major point she mentioned that the structure of new Basel capital accords. (Rosa Maria Lastra, 2004)
From this literature it's clear that for implementing new accord author and his team worked so hard. In Basel II high levels of issue arise and that was lot of attention and high level of capital requirement to fulfil expected and unexpected losses. They mainly explain two things in accord that are Basel II and its capital consistency and second one is Basel II and its accounting standard. Capital consistency is basically important in international framework and that helps to bank to know the financial position but that was only possible in local level. Basel II is mostly based on risk management and in this literature they give example of AIG. AIG main aim was to provide quality of supervisory in internationally. To implementing new accord fundaments of any company come first. In explanation of second thing they said that 'meeting of the minds' it means to promote bank risk profile for that it is accepted that new accord includes explicit requirement planned. (Jaime caruana, 2003)
After reading this literature I came to know some of limitation of Basel II as author said in his article. Author view was same as above mentioned data but his thinking regarding this accord is different. From this I know this accord reduce organisational risk and allow investor and banks to be more effective in their risk levels. After implementing this new accord banks and investor are improve evaluation and disclosure of risk. But apart from this Basel II has some limitation in their supervisory. Basel I is failed to recognize credit quality, capital exposure and its charge, risk transfer and mitigation of credit risk. So for this failure, Basel I was not taking place in financial market and international Banks. The major limitation of Basel II is, it supervises whole banks risk and its capital but generally it's applied to whole industry not for only banks. Secondly, In US whole banks are using Basel I accord and its running good so question is why other countries international banks going to implementing Basel II? Before implementing Basel II all banks firstly check their risk management and their control system and understand it and then assess. Basel II also assures to support and step up developments in bank risk management worldwide, as well as advance future modernization through its confidence on banks' internal methodologies. (William L Rutledge, 2005)
Basel II regulation system been in forced during the period of 1998 - 2002. There are mainly two types of credit rating models to measure default they are 1.) S & P credit rating 2.) Model developed by consulting firm FMV which base on Merton (1974) approach. Basel II can be explaining in terms of "single risk curve". It means capita charge for any given loan to the risk attributes of the loan, such as possibility of default (PD). After the recession the two effects are mainly arise, the first one loan losses and another one existing non-defaulted loan which are riskier and this curve explain in Basel II and from this portfolio of the banks going to up and this will put more attention on landing activities. So finally they explain how this new curve suitable for banks. But after all the things it has some limitation like, this system envision single one risk curve but it has to think about multiple risk factor not only think about single risk. So after all this thing banks has to make its own portfolio on basses of above two models and then measure all the figure using Basel formula and from that two broad massage reported, they were on the practical side, this model suggest that the capital requirements of Basel II have the capability to create an amount of additional capital charges that is, at a minimum and economically significant. (Anil Kashyap and Jeremy Stein, 2003)
Conclusion
The finally question arise in once mind how far Basel II framework succeeded in falling down risk measurement in financial system. So after all this literature review on Basel II, I found some of the advantages and disadvantages of this new accord.
Basically Basel II is implementing in financial market to minimize credit and operational risk. But so many banks are falling to implementing this new accord in their system because of it is complex and not flexible.
Basel II system is very important and useful to so many banks. So many banks were going to end their business because; in their system risk measurement was not done perfectly. But after the Basel II implementation its risk and credit measurement had done trough new accord formula.
With the use of this new accord banks and investor are able to calculate their risk and credit and after that they are able to invest in market. So their investment is free from risk.
But in this research paper I found some of the limitation of Basel II. In this the major limitation is, it's supervise only one system that is bank but it has to be for whole industry not for only banks.
So many banks realize that the rules and regulation of Basel II capital framework is very complex and hard to use in their system compare to Basel I.
This system only think about single risk curve but it has to envision multi risk factors which help whole industry in their future development able to stand in financial market.
But after some study I come to know that US banks are still using Basel I in their system and doing well, so the question arise that why other banks are using Basel II? And this question is still there.
In the end I just want to add that if Basel II capital adequacy system is faultless then why Basel III has been establish in near future by financial stability board.
