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 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.

1. Basic indicator approach
2. Standardized approach and
3. 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.

1. Foreign exchange risk
2. Interest rate position risk
3. 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.