As
the provisions of the Basel-II Accord begin to take
effect in 2007 in many parts of the world, bankers are
scrambling to respond. They are being called upon to
make major changes in the way they measure risk, report
their appetite for risk and manage their capital. The
stakes are high. Those firms that adopt sophisticated
methods for determining risk adjusted capital under
Basel-II could be rewarded with higher credit ratings,
stronger earnings and higher stock prices.
In
principle, the uniform 8% capital adequacy for all commercial
exposures under Basel I is less than logical- surely
credit risks in respect of an AAA-rated borrower and
a BBB borrower are significantly different and should
get properly reflected in the capital needed. The
Basel Committee defines operational risk as "The
risk of direct or indirect loss resulting from inadequate
or failed internal processes, people and systems or
from external events." The Basel-II guidelines
lay specific emphasis on the operational risk management
for banks, thereby reducing the financial loss that
they may incur due to breakdown of internal controls
and corporate governance leading to error, fraud and
failure to perform in a timely manner.
PSU
Banks are queuing up to hit the equity market to raise
capital as the deadline to provide for the Basel-II
norms nears. Banks are raising capital to maintain their
CAR which would fall after making provisioning according
to the Basel-II norms. Banks will need to provide for
market risk for investments as they prepare to meet
the tighter capital standards under Basel-II. |
