Basel II is the second of the Basel Accords , which are recommendations on banking laws and regulations issued by the Basel Committee on Banking Supervision . It is now extended and partially superseded by Basel III .
60-674: The Basel II Accord was published in June 2004. It was a new framework for international banking standards, superseding the Basel I framework, to determine the minimum capital that banks should hold to guard against the financial and operational risks. The regulations aimed to ensure that the more significant the risk a bank is exposed to, the greater the amount of capital the bank needs to hold to safeguard its solvency and overall economic stability. Basel II attempted to accomplish this by establishing risk and capital management requirements to ensure that
120-509: A "three pillars" concept – (1) minimum capital requirements (addressing risk), (2) supervisory review and (3) market discipline . The Basel I accord dealt with only parts of each of these pillars. For example: concerning the first Basel II pillar, only one risk, credit risk, was dealt with easily while the market risk was an afterthought; operational risk was not dealt with at all. The first pillar deals with maintenance of regulatory capital calculated for three major components of risk that
180-499: A Continental ". The office has, since the late 18th century, been customarily referred to as the singular "Treasury", without any preceding article , as a remnant of the country's transition from British to American English . For example, the department notes its guiding purpose as "Treasury's mission" instead of "the Treasury's mission." Robert Morris was designated Superintendent of Finance in 1781 and restored stability to
240-542: A Department of Treasury, in which shall be the following officers, namely: a Secretary of the Treasury, to be deemed head of the department; a Comptroller, an Auditor, a Treasurer, a Register, and an Assistant to the Secretary of the Treasury , which assistant shall be appointed by the said Secretary. Alexander Hamilton took the oath of office as the first secretary of the treasury on September 11, 1789. Hamilton had served as George Washington 's aide-de-camp during
300-484: A bank faces: credit risk , operational risk , and market risk . Other risks are not considered fully quantifiable at this stage. As the Basel II recommendations are phased in by the banking industry it will move from standardised requirements to more refined and specific requirements that have been developed for each risk category by each bank. The upside for banks that do develop their bespoke risk measurement systems
360-429: A bank has adequate capital for the risk the bank exposes itself to through its lending, investment and trading activities. One focus was to maintain sufficient consistency of regulations so to limit competitive inequality amongst internationally active banks. Basel II was implemented in 2008 in most major economies. The financial crisis of 2007–2008 intervened before Basel II could become fully effective. As Basel III
420-411: A box filled with U.S. currency, including a number of thousand-dollar bills, and reported it to Secretary Spinner. U.S. President Abraham Lincoln subsequently honored her with a commendation for her actions, and the federal government rewarded her with an appointment for life as a messenger with its Department of Issues. The U.S. Congress transferred several agencies that had previously been under
480-749: A final approach. They have required the Internal Ratings-Based approach for the largest banks, and the standardized approach will be available for smaller banks. In India, Reserve Bank of India has implemented the Basel II standardized norms on 31 March 2009 and is moving to internal ratings in credit and AMA (Advanced Measurement Approach) norms for operational risks in banks. Existing RBI norms for banks in India (as of September 2010): Common equity (incl of buffer): 3.6% (Buffer Basel 2 requirement requirements are zero); Tier 1 requirement: 6%. Total Capital: 9% of risk-weighted assets. According to
540-730: A questionnaire released by the Financial Stability Institute (FSI), 95 national regulators indicated they were to implement Basel II, in some form or another, by 2015. The European Union has already implemented the Accord via the EU Capital Requirements Directives and many European banks already report their capital adequacy ratios according to the new system. All the credit institutions adopted it by 2008–09. Australia, through its Australian Prudential Regulation Authority , implemented
600-730: A transitional remnant from British to American English . Hamilton's portrait appears on the obverse of the ten-dollar bill , while the Treasury Building in Washington, D.C. is depicted on the reverse . The history of the Department of the Treasury began in the turmoil of the American Revolution , when the Continental Congress at Philadelphia deliberated the crucial issue of financing
660-461: A war of independence against Great Britain . The Congress had no power to levy and collect taxes, nor was there a tangible basis for securing funds from foreign investors or governments. The delegates resolved to issue paper money in the form of bills of credit , promising redemption in coin on faith in the revolutionary cause. On June 22, 1775, only a few days after the Battle of Bunker Hill ,
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#1732772395292720-420: A year, except qualitative disclosures providing a summary of the general risk management objectives and policies which can be made annually. Institutions are also required to create a formal policy on what will be disclosed and controls around them along with the validation and frequency of these disclosures. In general, the disclosures under Pillar 3 apply to the top consolidated level of the banking group to which
780-772: Is another likely candidate to increase bank incentives to exploit regulation. Think-tanks such as the World Pensions Council (WPC) have also argued that European legislators have pushed dogmatically and naively for the adoption of the Basel II recommendations, adopted in 2005, transposed in European Union law through the Capital Requirements Directive (CRD), effective since 2008. 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
840-480: Is that they will be rewarded with potentially lower risk capital requirements. In the future, there will be closer links between the concepts of economic and regulatory capital. This is a regulatory response to the first pillar, giving regulators better 'tools' over those previously available. It also provides a framework for dealing with systemic risk , pension risk , concentration risk , strategic risk , reputational risk , liquidity risk and legal risk , which
900-523: Is the first Basel Accord . It arose from deliberations by central bankers from major countries during the late 1970s and 1980s. In 1988, the Basel Committee on Banking Supervision (BCBS) in Basel , Switzerland, published a set of minimum capital requirements for banks. It is also known as the 1988 Basel Accord, and was enforced by law in the Group of Ten (G-10) countries in 1992. The Committee
960-621: The American Revolutionary War and was influential in the ratification of the Constitution. Hamilton's financial and managerial acumen made him a logical choice for addressing the problem of the new nation's heavy war debt . His first official act as secretary was to submit a report to Congress in which he laid the foundation for the nation's financial health. To the surprise of many legislators, he insisted upon federal assumption and dollar-for-dollar repayment of
1020-617: The Bank of the United States , which acted as the government's fiscal agent . The Department of Treasury believes their seal was created by Francis Hopkinson , the treasurer of loans. He submitted bills to Congress in 1780 that authorized the design of department seals, including a seal for the Board of Treasury. While it is not certain that Hopkinson designed the seal, it closely resembles others he created. In 1861, Sophia Holmes became
1080-695: The Department of Justice as the Bureau of Alcohol, Tobacco, Firearms, and Explosives (BATFE). The regulatory and tax collection functions of ATF related to legitimate traffic in alcohol and tobacco remained with the treasury at its new Alcohol and Tobacco Tax and Trade Bureau (TTB). Effective March 1, 2003, the Federal Law Enforcement Training Center , the United States Customs Service , and
1140-653: The United States . Over 100 other countries also adopted, at least in name, the principles prescribed under Basel I. The efficacy with which the principles are enforced varies, even within nations of the Group. Basel I incentivized global banks to lend to members of the OECD and the IMF's General Arrangements to Borrow (GAB) while disincentivizing loans to non-members of these institutions. United States Department of
1200-529: The United States Secret Service were transferred to the newly created Department of Homeland Security ("DHS") . In 2020, the Treasury suffered a data breach following a cyberattack likely conducted by a nation state adversary , possibly Russia. This was in fact the first detected case of the much wider 2020 United States federal government data breach , which involved at least eight federal departments. The basic functions of
1260-530: The Basel II Framework on 1 January 2008. 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. In response to the financial crisis, the Basel Committee on Banking Supervision published revised global standards, known as Basel III . The Committee claimed that
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#17327723952921320-848: The Basel II framework applies. On September 30, 2005, the four US Federal banking agencies (the Office of the Comptroller of the Currency , the Board of Governors of the Federal Reserve System , the Federal Deposit Insurance Corporation , and the Office of Thrift Supervision ) announced their revised plans for the U.S. implementation of the Basel II accord. This delays implementation of the accord for US banks by 12 months. On November 15, 2005,
1380-536: The Basel II process, the 1996 Amendment to the Capital Accord to Incorporate Market Risks, and the November 2005 paper on Basel II: International Convergence of Capital Measurement and Capital Standards: A Revised Framework. No new elements have been introduced in this compilation. This version is now the current version. On November 1, 2007, the Office of the Comptroller of the Currency ( U.S. Department of
1440-561: The Continental Congress issued $ 2 million in bills; on July 25, 28 citizens of Philadelphia were employed by Congress to sign and number the currency. On July 29, 1775, the Second Continental Congress assigned the responsibility for the administration of the revolutionary government's finances to joint Continental treasurers George Clymer and Michael Hillegas . Congress stipulated that each of
1500-636: The Department of the Treasury include: With respect to the estimation of revenues for the executive branch , Treasury serves a purpose parallel to that of the Office of Management and Budget for the estimation of spending for the executive branch, the Joint Committee on Taxation for the estimation of revenues for Congress, and the Congressional Budget Office for the estimation of spending for Congress. From 1830 until 1901, responsibility for overseeing weights and measures
1560-563: The Treasury The Department of the Treasury ( USDT ) is the national treasury and finance department of the federal government of the United States , where it serves as an executive department . The department oversees the Bureau of Engraving and Printing and the U.S. Mint . These two agencies are responsible for printing all paper currency and minting coins , while the treasury executes currency circulation in
1620-662: The Treasury ) approved a final rule implementing the advanced approaches of the Basel II Capital Accord. This rule establishes regulatory and supervisory expectations for credit risk, through the Internal Ratings Based Approach (IRB), and operational risk, through the Advanced Measurement Approach (AMA), and articulates enhanced standards for the supervisory review of capital adequacy and public disclosures for
1680-423: The United States has limited statutory duties, but advises the Secretary on various matters such as coinage and currency production. Signatures of both officials appear on all Federal Reserve notes . The department was established by an Act of Congress in 1789 to manage government revenue . The first secretary of the treasury was Alexander Hamilton , who was sworn into office on September 11, 1789. Hamilton
1740-399: The accord combines under the title of residual risk. Banks can review their risk management system. The Internal Capital Adequacy Assessment Process (ICAAP) is a result of Pillar 2 of Basel II accords. This pillar aims to complement the minimum capital requirements and supervisory review process by developing a set of disclosure requirements which will allow the market participants to gauge
1800-668: The aegis of the Treasury Department to other departments as a consequence of the September 11 attacks . Effective January 24, 2003, the Bureau of Alcohol, Tobacco and Firearms (ATF), which had been a bureau of the department since 1972, was extensively reorganized under the provisions of the Homeland Security Act of 2002 . The law enforcement functions of ATF, including the regulation of legitimate traffic in firearms and explosives , were transferred to
1860-470: The capital adequacy of an institution. Market discipline supplements regulation as sharing of information facilitates the assessment of the bank by others, including investors, analysts, customers, other banks, and rating agencies, which leads to good corporate governance. The aim of Pillar 3 is to allow market discipline to operate by requiring institutions to disclose details on the scope of application, capital, risk exposures, risk assessment processes, and
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1920-524: The capital adequacy of the institution. It must be consistent with how the senior management, including the board, assess and manage the risks of the institution. When market participants have a sufficient understanding of a bank's activities and the controls it has in place to manage its exposures, they are better able to distinguish between banking organizations so that they can reward those that manage their risks prudently and penalize those that do not. These disclosures are required to be made at least twice
1980-565: The colonies contribute to the Continental government's funds. To ensure proper and efficient handling of the growing national debt in the face of weak economic and political ties between the colonies, the Congress, on February 17, 1776, designated a committee of five to superintend the treasury, settle accounts , and report periodically to the Congress. On April 1, a Treasury Office of Accounts, consisting of an auditor general and clerks ,
2040-492: The committee released a revised version of the Accord, incorporating changes to the calculations for market risk and the treatment of double default effects. These changes had been flagged well in advance, as part of a paper released in July 2005. On July 4, 2006, the committee released a comprehensive version of the Accord, incorporating the June 2004 Basel II Framework, the elements of the 1988 Accord that were not revised during
2100-442: The country in which to base a particular type of business, based in part on how Basel II is ultimately interpreted by various countries' legislatures and regulators. To assist banks operating with multiple reporting requirements for different regulators according to geographic location, there are several software applications available. These include capital calculation engines and extend to automated reporting solutions which include
2160-467: The country's $ 75 million debt in order to revitalize the public credit : "[T]he debt of the United States was the price of liberty. The faith of America has been repeatedly pledged for it, and with solemnities that give peculiar force to the obligation." Hamilton foresaw the development of industry and trade in the United States, suggesting that government revenues be based upon customs duties . His sound financial policies also inspired investment in
2220-863: The dollar payments could be effected in New York, the Herstatt Bank was liquidated by German regulators. This incident prompted the G-10 nations to form the Basel Committee on Banking Supervision in late 1974, under the auspices of the Bank for International Settlements (BIS) located in Basel , Switzerland. Basel I, that is, the 1988 Basel Accord, is primarily focused on credit risk and appropriate risk-weighting of assets . Assets of banks were classified and grouped in five categories according to credit risk, carrying risk weights of 0% (for example cash, bullion , home country debt like Treasuries), 20% (securitisations such as mortgage-backed securities (MBS) with
2280-539: The domestic fiscal system. It collects all federal taxes through the Internal Revenue Service ; manages U.S. government debt instruments ; licenses and supervises banks and thrift institutions ; and advises the legislative and executive branches on matters of fiscal policy . The department is administered by the secretary of the treasury , who is a member of the Cabinet . The treasurer of
2340-441: The draft guidelines published by RBI the capital ratios are set to become: Common Equity as 5% + 2.5% (Capital Conservation Buffer) + 0–2.5% (Counter Cyclical Buffer), 7% of Tier 1 capital and minimum capital adequacy ratio (excluding Capital Conservation Buffer) of 9% of Risk Weighted Assets. Thus the actual capital requirement is between 11 and 13.5% (including Capital Conservation Buffer and Counter Cyclical Buffer). In response to
2400-579: The finances of the confederation of former colonies until September 1789. The First United States Congress convened in New York City on March 4, 1789, marking the beginning of government under the U.S. Constitution . On September 2, 1789, Congress created a permanent institution for the management of government finances: Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled, That there shall be
2460-488: The financial crisis. According to the study, capital regulation based on risk-weighted assets encourages innovation designed to circumvent regulatory requirements and shifts banks' focus away from their core economic functions. Tighter capital requirements based on risk-weighted assets, introduced in the Basel III, may further contribute to these skewed incentives. New liquidity regulation, notwithstanding its good intentions,
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2520-534: The first Black woman to be employed by the Treasury Department and by the Federal government of the United States when Senator Henry Wilson , James G. Blaine and others advocated for her hiring as a janitor under Secretary of the Treasury Francis Spinner . She was paid fifteen dollars per month. In 1862, she prevented a major theft from the department of more than $ 200,000 when she came across
2580-413: The formulation of policy and management of the department as a whole, while the operating bureaus carry out the specific operations assigned to the department. The Treasury Department has authorized a budget for Fiscal Year 2024 of $ 16.5 billion. The budget authorization is broken down as follows: In the latest Center for Effective Government analysis of the fifteen federal agencies that receive
2640-590: The highest AAA rating ), 50% (municipal revenue bonds, residential mortgages), 100% (for example, most corporate debt), and some assets given no rating. Banks with an international presence are required to hold capital equal to 8% of their risk-weighted assets (RWA). The tier 1 capital ratio = tier 1 capital / all RWA The total capital ratio = (tier 1 + tier 2 capital) / all RWA Leverage ratio = total capital/average total assets Banks are also required to report off-balance-sheet items such as letters of credit, unused commitments, and derivatives. These all factor into
2700-627: The largest U.S. banks. On July 16, 2008 the federal banking and thrift agencies (the board of governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, and the Office of Thrift Supervision) issued a final guidance outlining the supervisory review process for the banking institutions that are implementing the new advanced capital adequacy framework (known as Basel II). The final guidance, relating to
2760-572: The major factors which drove the crisis was the evaporation of liquidity in the financial markets, the BCBS also published principles for better liquidity management and supervision in September 2008. A recent OECD study suggest that bank regulation based on the Basel accords encourage unconventional business practices and contributed to or even reinforced adverse systemic shocks that materialised during
2820-418: The nation's finances. Morris, a wealthy colonial merchant , was nicknamed "the financier" because of his reputation for procuring funds or goods on a moment's notice. His staff included a comptroller , a treasurer , a register , and auditors , who managed the country's finances through 1784, when Morris resigned because of ill health. The treasury board, consisting of three commissioners, continued to oversee
2880-922: The new standards would lead to a better quality of capital, increased coverage of risk for capital market activities and better liquidity standards among other benefits. Nout Wellink , former chairman of the BCBS , wrote an article in September 2009 outlining some of the strategic responses which the Committee should take as response to the crisis. He proposed a stronger regulatory framework which comprises five key components: (a) better quality of regulatory capital, (b) better liquidity management and supervision, (c) better risk management and supervision including enhanced Pillar 2 guidelines, (d) enhanced Pillar 3 disclosures related to securitization, off-balance sheet exposures and trading activities which would promote transparency, and (e) cross-border supervisory cooperation. Given one of
2940-577: The regulatory authority was abdicated in favour of private rating agencies. Long before the implementation of Basel II George W. Stroke and Martin H. Wiggers pointed out, that a global financial and economic crisis will come, because of its systemic dependencies on a few rating agencies. After the breakout of the crisis Alan Greenspan agreed to this opinion in 2007. At least the Financial Crisis Inquiry Report confirmed this point of view in 2011. Basel I Basel I
3000-453: The reports required under COREP / FINREP . For example, U.S. Federal Deposit Insurance Corporation Chair Sheila Bair explained in June 2007 the purpose of capital adequacy requirements for banks, such as the accord: Regulators in most jurisdictions around the world plan to implement the new accord, but with widely varying timelines and use of the varying methodologies being restricted. The United States ' various regulators have agreed on
3060-617: The risk weighted assets, which are reported to regulators. In the United States, the report is typically submitted to the Federal Reserve Bank as HC-R for the bank-holding company and submitted to the Office of the Comptroller of the Currency (OCC) as RC-R for just the bank. From 1988 this framework was progressively introduced in member countries of G-10, comprising 13 countries as of 2013 : Belgium , Canada , France , Germany , Italy , Japan , Luxembourg , Netherlands , Spain , Sweden , Switzerland , United Kingdom and
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#17327723952923120-542: The supervisory review, is aimed at helping banking institutions meet certain qualification requirements in the advanced approaches rule, which took effect on April 1, 2008. A series of proposals to enhance the Basel II framework was announced by the Basel Committee in January 2009. The proposals included: revisions to the Basel II market risk framework; the guidelines for computing capital for incremental risk in
3180-570: The trading book. In addition, capital requirements for trading book securitisation exposures were aligned with those in the banking book. A further consultation was launched in December 2009 which resulted in further updates in 2010. One of the most difficult aspects of implementing an international agreement is the need to accommodate differing cultures, varying structural models, complexities of public policy, and existing regulation. Banks' senior management will determine corporate strategy, as well as
3240-439: The trading book; and proposed enhancements to the Basel II framework. A final package of measures, known as Basel 2.5, enhanced the three pillars of the Basel II framework and strengthened the 1996 rules governing trading book capital was issued in July 2009 by the newly expanded Basel Committee. These measures included revisions to the Basel II market-risk framework and the guidelines for computing capital for incremental risk in
3300-459: Was appointed by President George Washington on the recommendation of Robert Morris , Washington's first choice for the position, who had declined the appointment. Hamilton established the nation's early financial system and for several years was a major presence in Washington's administration . The department is customarily referred to as "Treasury", solely, without any preceding article –
3360-505: Was carried out by the Office of Standard Weights and Measures under the auspices of the Treasury Department. After 1901, that responsibility was assigned to the agency that subsequently became known as the National Institute of Standards and Technology . The Department of the Treasury is organized into two major components: the departmental offices and the operating bureaus. The departmental offices are primarily responsible for
3420-580: Was established to facilitate the settlement of claims and to keep the public accounts for the government of the United Colonies. With the signing of the Declaration of Independence on July 4, 1776, the newborn republic as a sovereign nation was able to secure loans from abroad. Despite the infusion of foreign and domestic loans, the united colonies were unable to establish a well-organized agency for financial administration. Michael Hillegas
3480-401: Was first called Treasurer of the United States on May 14, 1777. The Treasury Office was reorganized three times between 1778 and 1781. The $ 241.5 million in paper Continental bills devalued rapidly. By May 1781, the dollar collapsed at a rate of from 500 to 1000 to 1 against hard currency . Protests against the worthless money swept the colonies, giving rise to the expression " not worth
3540-517: Was formed in response to the messy liquidation of Cologne -based Herstatt Bank in 1974. On 26 June 1974 a number of banks had released Deutschmarks (the German currency) to the Herstatt Bank in exchange for dollar payments deliverable in New York City . Due to differences in the time zones , there was a lag in the dollar payment to the counterparty banks; during this lag period, before
3600-505: Was negotiated, the crisis was top of mind and accordingly more stringent standards were contemplated and quickly adopted in some key countries including in Europe and the US. The final version aims at: While the final accord has at large addressed the regulatory arbitrage issue, there are still areas where regulatory capital requirements will diverge from the economic capital . Basel II uses
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