Improving risk management through implementation of Pillar 2 | The critical challenge facing banks and regulators under Basel II: improving risk management through implementation of Pillar 2 Simon Topping Hong Kong Monetary Authority 28 September 2004 GARP Asia Pacific Convention Implementation of Basel II in Hong Kong Hong Kong is one of the first jurisdictions to publish detailed implementation plans for Basel II Re Pillar 1, we will allow institutions to choose between standardised approach, foundation IRB and advanced IRB for credit risk, and between basic indicator approach and standardised approach (not AMA) for operational risk; we will also allow smaller institutions to choose a “basic” approach Institutions can now plan accordingly. The first big question is whether - and when – to adopt IRB But focus is now shifting to a second key consideration – what plans to make in relation to “Pillar 2” risks Main objectives of Pillar 2 Ensure that banks have adequate capital to support all the material risks in their business More . | The critical challenge facing banks and regulators under Basel II: improving risk management through implementation of Pillar 2 Simon Topping Hong Kong Monetary Authority 28 September 2004 GARP Asia Pacific Convention Implementation of Basel II in Hong Kong Hong Kong is one of the first jurisdictions to publish detailed implementation plans for Basel II Re Pillar 1, we will allow institutions to choose between standardised approach, foundation IRB and advanced IRB for credit risk, and between basic indicator approach and standardised approach (not AMA) for operational risk; we will also allow smaller institutions to choose a “basic” approach Institutions can now plan accordingly. The first big question is whether - and when – to adopt IRB But focus is now shifting to a second key consideration – what plans to make in relation to “Pillar 2” risks Main objectives of Pillar 2 Ensure that banks have adequate capital to support all the material risks in their business More comprehensive recognition of risk, including risks not covered (. interest rate risk in the banking book) or not adequately covered (. credit concentration risk) under Pillar 1 Encourage banks to develop and use better risk management techniques Focus on banks’ capital planning and risk management capabilities (not just on setting of capital) Four Pillar 2 Principles Principle 1 : Banks should have a process for assessing their overall capital adequacy in relation to their risk profile and a strategy for maintaining their capital levels (. CAAP) Principle 2 : Supervisors should review and evaluate banks’ internal capital adequacy assessments and strategies Principle 3 : Supervisors should expect banks to operate above the minimum regulatory capital ratios and should have the ability to require so Principle 4 : Supervisors should seek to intervene at early stage to prevent capital from falling below the minimum levels required to support the risk characteristics of a particular .
