Market Change
Basel II
At Citi we view the financial stability of our clients as paramount. With the introduction of Basel II firms can increasingly use collateral as a credit risk mitigant and address financial risk by promoting capital adequacy and improving the alignment between risk measurement and regulatory capital requirements.
Basel II Explained
Short for the new Basel Capital Accord, Basel II lays down new guidelines for determining the minimum solvency requirements for banks. The main change in these guidelines is a new system for weighting the risks run by banks in their loans to retail and corporate customers. Ultimately, the objective of Basel II is to improve the soundness of the financial system.
(specialinvestor.com)
- The Three Pillars
Basel II is based on three "pillars" which aim to have a holistic approach to managing risk. The first (Minimum Capital) focuses on capital requirements to better reflect the true nature of risks. The second (Supervisory Review) aims at a more involved supervisory and regulatory system). The last (Market Disclosure) will potentially result in greater discipline imposed by the market.
- Methodologies to calculate risk capital
The BIS (Bank of International Settlements) has prescribed different methodologies (in varying degrees of sophistication) for Banks to calculate Credit Risk and Operational Risk. Citigroup, as a large, complex, international, financial institution, will be adopting the Advanced Approach to calculate Credit Risk and the Advanced Measurement Approach to calculate Operational Risk.
- The Complexity & Challenges of Basel II
In contrast to Basel I, which largely focussed on credit risk, Basel II has a far more comprehensive approach to the major types of risk. This, of course, results in increased complexity and challenges which have to be managed effectively. Additionally, these changes will also result in a new breed of "winners" and "losers" depending on their respective portfolios.
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