The Basel Handbook
First published:
ISBN: 9781904339557
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Rebalancing the Three Pillars of Basel II
Jean-Charles Rochet
Development and Validation of Key Estimates for Capital Models
Explaining the Correlation in Basel II: Derivation and Evaluation
Explaining the Credit Risk Elements in Basel II
Loss Given Default and Recovery Risk: From Basel II Standards to Effective Risk Management Tools
Assessing the Validity of Basel II Models in Measuring Risk of Credit Portfolios
Measuring Counterparty Credit Risk for Trading Products under Basel II
Implementation of an IRB-Compliant Rating System
Stress Tests of Banks’ Regulatory Capital Adequacy: Application to Tier 1 Capital and to Pillar 2 Stress Tests
Advanced Credit Model Performance Testing to Meet Basel Requirements: How Things Have Changed!
Designing and Implementing a Basel II Compliant PIT–TTC Ratings Framework
Basel II in the Light of Moody’s KMV Evidence
Basel II Capital Adequacy Rules for Retail Exposures
IRB-Compliant Models in Retail Banking
Basel II Capital Adequacy Rules for Securitisations
Regulatory Priorities and Expectations in the Implementation of the IRB Approach
Market Discipline and Appropriate Disclosure in Basel II
Validation of Banks’ Internal Rating Systems – A Supervisory Perspective
Rebalancing the Three Pillars of Basel II
Implementing a Basel II Scenario-Based AMA for Operational Risk
Loss Distribution Approach in Practice
An Operational Risk Rating Model Approach to Better Measurement and Management of Operational Risk
Constructing an Operational Event Database
Insurance and Operational Risk
INTRODUCTION
The on-going reform of the Basel Accord is supposed to rely on three “pillars”: a new capital ratio, supervisory review and market discipline. But even a cursory look at the proposals of the Basel Committee on Banking Supervision (BCBS) reveals a certain degree of imbalance between these three pillars. Indeed, the BCBS gives a lot of attention to the refinements of the risk weights in the new capital ratio (132 pages in the 3rd Consultative Paper of April 2003) but is much less precise about the other pillars (16 pages on Pillar 2 and 15 pages on Pillar 3).
Even though the initial capital ratio (Basel Committee 1988) has been severely criticised for being too crude and opening the door to regulatory arbitrage, it seems strange to insist so much on the importance of supervisory review11For example, the BCBS insists on the need to “enable early supervisory intervention if capital does not provide a sufficient buffer against risk” (Basel Committee 2003). and market discipline as necessary complements to capital requirements, while remaining silent of the precise ways22In particular, in spite of the existence of very precise proposals by US economists (Calomiris 1998; Ev
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