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History of Basel IIThe initial Basel Accord in 1988 was based on a simple model to measure capital. In today's world this approach is less meaningful for many banks. For example, in the 1998 Accord the risk was based across exposure groups and not the individual elements of credit worthiness within these groups. There has been many advances which will allow a more detailed approach to calculating Capital, such as better Credit ratings information and the development of Information technology. Also, improvements in internal processes, and better risk management practices such as securitisation have changed leading organisations’ monitoring and management of exposures and activities. Supervisors and sophisticated banking organisations have found that the static rules set out in the 1988 Accord have not kept pace with advances in sound risk management practices. It's likely that existing capital regulations may not reflect banks’ actual business practices. The upgraded Basel II Framework relates more to the underlying risks in banking and provides better incentives for improved risk management. It builds on the 1988 Accord’s basic structure for setting capital requirements and improves the capital framework’s sensitivity to the risks that banks actually face. This will be achieved in part by aligning capital requirements more closely to the risk of credit loss and by introducing a new capital charge for exposures to the risk of loss caused by operational failures. Basel will demand that a certain minimum Capital requirement is met, as well as another two imprtant factors, the Supervisory Role and Market Discipline. This are the three pillars of Basel II.
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