Basel II—essentials
Produced in partnership with Morrison & Foerster LLP
Basel II—essentials

The following Financial Services practice note Produced in partnership with Morrison & Foerster LLP provides comprehensive and up to date legal information covering:

  • Basel II—essentials
  • The first pillar—minimum capital
  • Tier 1 capital
  • Tier 2 capital
  • Tier 3 capital
  • Risk-weighting of assets
  • Calculating credit risk
  • Standardised approach
  • Credit risk mitigation
  • The IRB approach
  • More...

This note provides a legislative history of Basel II which preceded the Basel III reforms. For further information regarding Basel III and CRR and CRD IV, please see CRD IV—essentials.The Basel II Framework, published in its comprehensive form in July 2006 by the Basel Committee of Banking Supervision (BCBS), provided for three regulatory 'pillars' to apply in respect of internationally active banks:

  1. first pillar—minimum capital requirements to be held by banks in respect of their credit risk, operational risk and market risk.

  2. second pillar—supervisory review process, under which banking supervisors review how well banks are assessing their capital requirements for their risks and, if required, take action if they are not satisfied with the banks’ assessments, and

  3. third pillar—market discipline, under which banks are required to make disclosure of information relevant to participants in the financial markets.

On 21 April 2015, the BCBS published a press release on the removal of certain national discretions from the Basel II capital framework.

The BCBS agreed to remove national discretions relating to the following issues:

  1. treatment of past-due loans

  2. definition of retail exposures

  3. transactional arrangements for corporate, sovereign, bank and retail exposures

  4. rating structure standards for wholesale exposures

  5. internal and external audit

  6. re-aging.

The BCBS noted that the national discretion relating to the internal ratings-based approach treatment of equity exposures expired in 2016. In the same press release, the BCBS

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