BASEL II :

In January 2001, the Basel Committee on Banking Supervision issued a new proposal for a Basel Capital Accord to replace the 1988 Accord. The New Basel Capital Accord focused on, three pillars viz.

– Pillar I – Minimum capital requirement

– Pillar II – Supervisory review

– Pillar III – Market discipline

Pillar I – Minimum capital requirement: The Committee on Banking Supervision recommended the target standard ratio of capital to Risk Weighted Assets should be at least 8% (of which the core capital element would be at least 4%). The minimum capital adequacy ratio of 8% was prescribed taking into account the credit risk. However, in India the Reserve Bank of India has prescribed the minimum capital adequacy ratio of 9% of Risk Weighted Assets.

Pillar II – Supervisory review: The Supervisory review should be carried out in the following manner.

– Banks should have a process for assessing their overall capital adequacy

– Supervisors should review banks’ assessments

– Banks are expected to operate above minimum

– Supervisor’s intervention if capital is not sufficient

Pillar III: Market Discipline

1. Role of the market in evaluating the adequacy of bank capital

2. Streamlined catalogue of disclosure requirements

3. Close coordination with International Accounting Standards Board

4. In principle, disclosure of data on semiannual basis