Internal affairs

Banks' internal economic capital figures are likely to be central to supervisors' assessment of regulatory capital adequacy under Pillar II of the Basel II framework. Bob Allen of the Australian Prudential Regulation Authority explores the relationship between economic and Basel II regulatory capital


Under Pillar II of the new Basel II regulatory capital framework1, banks are required to have a formalised internal process in place for assessing their capital adequacy, taking into account the nature and magnitude of the various risks to which they are exposed. Banking supervisors are then expected to review these internal processes and to assess whether the banks' minimum regulatory capital requirements should be increased above the absolute Pillar I minimum.

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