Bank Regulation -- Basel II

After the posted theory retrospect, the current circumstances of bank regulation shall be researched. In recent decade, the UK bank is regulated by the Basel Accords and Bank Act 2009.

The Basel Accords is viewed as the banking regulation and supervision recommendations, including Basel I, Basel II and Basel III. Those all are issued by Basel Committee on Banking Supervision (BCBS). This blog merely focus on the last two regulations for the specific period.

Basel II, as the second of the Basel Accords, published in June 2004 and updated seven times from 2005 and 2009 (Figure 1).  

Figure 1: Chronological Updates (referenced by Basel II)

This accord emphasised three major pillars, namely, Minimum Capital, Supervisor Review and Market Discipline. The first pillar refers to banks can keep the minimum capital under the credit risk, operational risk and market risk, concluded in the equation:

Two Capital / {RWA_Credit + [MRC_Market * 12.5] + [ORC_Opr’l * 12.5]}>=8% with Assets

The second focus on strengthening the banking regulation though the key principles, which are rigorous bank process, supervisor response and supervisor intervention. The third one aims to complement regulations by regulators and disclosures requirements. The integral overview of Basel II in the following video:

In the next blog, I will discuss how the financial crisis impacted on the Basel II.