01. The New Accord will be based on three mutually – reinforcing “Pillars”
Pillar 1: Minimum capital requirements. There will be a minimum capital
requirement for each bank, based on an assessment of its credit risk,
market risk and operational risk.
Pillar 2: Supervisory review of capital adequacy. There should be a supervisory
review process with the Banking Supervision assisting banks to develop
their Risk Management systems and ensuring that the rules are applied
properly.
Pillar 3: Public disclosure/market discipline. The Banking Market should
operate with greater discipline through greater disclosures by Banks.
Pillar 1
a. Minimum Capital Requirements
The minimum ratio is 10%
Capital ratio = Capital of the Bank
Risk-weighted assets
b. Credit Risk
The credit risk method is based on two main approaches namely standardized approach and an Internal Ratings based approach.
c. Operational Risk
This can be defined as the risk of losses resulting from failed internal processes
people and systems or from external events.
There are three possible approaches to calculating an operational risk capital requirements.
- Basic indicator approach
- Standardized approach and
- Advanced/internal measurement approaches
With the basic indicator approach, the minimum capital requirement is 15% of the Banks average annual gross income over the previous three years.
d. Market Risk
Market risk is defined as the risk of losses in on-balance sheet positons arising from movements in market prices.
It requires Banks to maintain a minimum amount of Capital to support the market risk. Market risk is calculating under three categories.
- Foreign exchange risk
- Interest rate position risk
iii. Equity position risk.
A Bank can calculate the market risk for each of these categories either by applying the standard rules or by using internal risk models. |
