Basel II

Basel II seeks to ensure any bank or financial services company handling money has adequate funds available to reflect the risks it faces at any time.

It is the second of the Basel Accords – recommendations drafted by the 13 countries that make up the Basel Committee on Banking Supervision.

Compliance surrounds demonstrating due diligence – for instance accurately logging all transactions and accounting procedures. Companies must also declare details of their risks, risk management practices and capital.

Basel II is based around a concept of ‘three pillars’. The first deals with the minimum capital requirements for addressing risk; the second with regulatory review and supervision; and the third deals with the disclosures a bank should make.

Operational Risk

The Basel Committee defines operational risk as: ‘The risk of loss resulting from inadequate or failed internal processes, people and systems or from external events.’

This definition includes legal risk, but excludes strategic and reputational risk.

Basel II compliance therefore requires banks to be able to assess, monitor and manage operational risk accurately. Understanding linkages between different legal entities and organisations is key to this risk assessment.

Capital adequacy

Capital adequacy is a measure of the financial strength of a bank or securities firm, typically as a ratio of its capital to its assets. For countries that have chosen to adopt Basel II, banks must satisfy a specific worldwide capital adequacy calculation to comply with their regulators.

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