The following will be discussed in this chapter: Basel II, the accord in operation, policy goals of regulation, the four approaches to financial supervision, the institutional approach, the functional approach, the integrated approach, and the twin peaks approach. | MBF-705 LEGAL AND REGULATORY ASPECTS OF BANKING SUPERVISION OSMAN BIN SAIF Session: FIFTEEN Revision session 2 BASEL II 3 Basel II Basel II is the second of the Basel Accords, (now extended and effectively superseded by Basel III), which are recommendations on banking laws and regulations issued by the Basel Committee on Banking Supervision. 4 Basel II (Contd.) Basel II, initially published in June 2004, was intended to create an international standard for banking regulators to control how much capital banks need to put aside to guard against the types of financial and operational risks banks (and the whole economy) face. 5 Basel II (Contd.) In theory, Basel II attempted to accomplish this by setting up risk and capital management requirements designed to ensure that a bank has adequate capital for the risk the bank exposes itself to through its lending and investment practices. 6 The accord in operation Basel II uses a "three pillars" concept – minimum capital . | MBF-705 LEGAL AND REGULATORY ASPECTS OF BANKING SUPERVISION OSMAN BIN SAIF Session: FIFTEEN Revision session 2 BASEL II 3 Basel II Basel II is the second of the Basel Accords, (now extended and effectively superseded by Basel III), which are recommendations on banking laws and regulations issued by the Basel Committee on Banking Supervision. 4 Basel II (Contd.) Basel II, initially published in June 2004, was intended to create an international standard for banking regulators to control how much capital banks need to put aside to guard against the types of financial and operational risks banks (and the whole economy) face. 5 Basel II (Contd.) In theory, Basel II attempted to accomplish this by setting up risk and capital management requirements designed to ensure that a bank has adequate capital for the risk the bank exposes itself to through its lending and investment practices. 6 The accord in operation Basel II uses a "three pillars" concept – minimum capital requirements (addressing risk), supervisory review and market discipline. 7 Basel II and the global financial crisis The role of Basel II, both before and after the global financial crisis, has been discussed widely. While some argue that the crisis demonstrated weaknesses in the framework, others have criticized it for actually increasing the effect of the crisis. 8 Basel II and the global financial crisis (Contd.) In essence, they forced private banks, central banks, and bank regulators to rely more on assessments of credit risk by private rating agencies. Thus, part of the regulatory authority was abdicated in favor of private rating agencies 9 Policy goals of Regulation It is commonly understood that financial regulation should be designed to achieve certain key policy goals, including: (a) safety and soundness of financial institutions, (b) mitigation of systemic risk, 10 10 Policy goals of Regulation (Contd.) (c) fairness and efficiency of markets, and (d) the protection of customers and investors. 11
