Global Bank Regulation: Principles and Policies

Chapter 10

The New Capital Adequacy Framework

Basel II and Other Risks

Traditionally, the most significant risk factor for banks was credit risk. Most bank failures are the result of the inability of bank borrowers to repay in full or on time. However, as we saw in the preceding two chapters, a common criticism of Basel I was that it concentrated almost exclusively on credit risk and ignored other risks that may also threaten a bank’s solvency. Basel II addresses this deficiency by introducing capital requirements for a wider range of risks. It does so in two ways. First, pillar 1 provides an explicit capital charge for market and operational risks in addition to the credit risk capital charge. Second, pillar 2 requires bank management and supervisors ...