PILLAR 2: SUPERVISORY REVIEW PROCESS

The second pillar of the new framework aims at ensuring that each bank has sound internal processes to assess the adequacy of its capital based on a thorough evaluation of its risks. Supervisors are responsible for evaluating how well banks are assessing their capital needs relative to their risks. The Basel Committee regards the market discipline through enhanced disclosure as a fundamental part of the new accord. It considers that disclosure requirements and recommendations will allow market participants to assess key pieces of information for the application of the accord.

The risk-sensitive approaches developed by the new accord rely extensively on banks' internal methodologies giving banks more discretion in calculating their capital requirements. Hence, separate disclosure requirements become prerequisites for supervisory recognition of internal methodologies for credit risk, credit risk mitigation techniques and others areas of implementation. Disclosure prerequisites will also apply to the advanced approach of operational risk. In the view of the Committee, effective disclosure is essential to ensure that market participants can better understand banks' risk profiles and the adequacy of their capital positions.

The Committee formulated four basic principles that should inspire supervisors' policies.

• Banks should have a process for assessing their overall capital in relation to their risk profile and a strategy for maintaining their capital levels.

• Supervisors should review and evaluate banks' internal capital adequacy assessments and strategies, as well as their ability to monitor and ensure their compliance with regulatory capital ratios. Supervisors should take appropriate supervisory actions if they are not satisfied with the results of this process.

• Supervisors should expect banks to operate above the minimum regulatory capital ratios and should have the ability to require banks to hold capital in excess of this minimum.

• Supervisors should intervene at an early stage to prevent capital from falling below the minimum levels required to support the risk of a particular bank and should require corrective actions if capital is not maintained or restored.

 
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