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Implementation of Basel II for different types of Banking System

Introduction
The Basel Committee on Banking Supervision released the revised capital adequacy framework (commonly referred to as “Basel II” or “the New Capital Accord”) in June 2004. The main purpose of this revised framework is to align minimum capital requirement of banks more closely to the risks they face. Over recent years many financial institutions have invested resources in the credit and operational risk arising from their business operations, with the intention to manage credit and operational risk across geographic, business and product lines. This revised framework also provides a range of options for determining the capital requirements for credit risk and operational risk to allow banks and supervisors to select approaches that are most appropriate for their operations and their financial market infrastructure.
In order to address the increasingly apparent shortcomings of the current capital framework, Basel II will introduce more sophisticated approaches for calculating credit risk capital requirements, and aims to reduce the scope for regulatory capital arbitrage, allow for credit risk mitigation techniques, introduce a capital charge for operational risk as well as greater transparency through comprehensive disclosure requirements.



The Origins of Basel II
The Basel II framework is based on a three-pillar structure (see Appendix 1), for instance minimum capital requirements (Pillar I), the supervisory review process (Pillar II), and market discipline (Pillar III). Apart from including operational risk as a new category of risk in the definition of risk-weighted assets, the Basel II proposals and the Capital Requirements Directive (CRD), will allow banks to use their own risk assessments in calculating their capital requirements. To this end, there will be two approaches for calculating capital requirements, a...