Pillar II complements the 'black letter’ requirements of Pillar I and is intended to achieve two objectives: to ensure that banks have adequate capital to support all the risks in their business and to encourage them to use better techniques for monitoring and managing their risks.
The second pillar specifically emphasises the need for a qualitative approach to supervising banks. It constitutes an integral part of the new capital accord and ranks equally alongside the minimum capital requirements and the call for market transparency.
Pillar II in the New Basel Accord: The Challenge of Economic Capital takes you through every main strand of Pillar II. It tackles the regulatory framework, shows how to reconcile the various regulatory sources and focuses on the following sequence of questions:
- What additional capital is required to support Pillar I risks where the Basel II models do not adequately reflect the unique circumstances of the particular bank?
- What additional capital is required to support risks not captured under Pillar I at all?
- What reduction in capital should be allowed to account for the fact that individual risks may be less than perfectly correlated?
- What further adjustment should be made to counteract procyclical movements in regulatory capital resulting from the Pillar I calculation?
- How should a banking group’s economic capital be allocated to its business units and legal entities?
- How will supervisors from different countries interact when assessing Pillar II implementation in international banks?
- How will hybrid capital help in preserving and maintaining the capital adequacy levels dictated by Pillar II?
Pillar II in the New Basel Accord is an indispensable book for any financial practitioner affected by the Basel II accord, including chief financial officers, chief operating officers, chief investment officers, risk managers, credit risk managers, senior compliance officers, and also those working in the fields of operational risk, compliance, regulation, credit, and risk management.
- Publish date
- 1 Dec 2008
- 155mm x 235mm
Table of contents
About the Editor
About the Authors
Federal Reserve Board
Frank De Jonghe
PART I: THE REGULATORY FRAMEWORK
1 Pillar II in the New Basel Accord and in the New European Directives
Martina Bignami and Andrea Pilati
Bank of Italy
2 The Capital Adequacy Assessment Process: A Supervisory Perspective
Preston Thompson; David Palmer
Federal Reserve Bank of Boston; Federal Reserve Board, Washington
3 The International Coordination of the Supervisory Activity under Pillar II
Andrea Enria, Cécile Meys and Oleg Shmeljov, Committee of European Banking Supervisors
PART II: THE MAIN RISK TYPES TO BE ASSESSED UNDER PILLAR II
4 Concentration Risk in the Credit Portfolio
5 Specification and Calibration Errors in Measures of Portfolio Credit Risk
Nikola Tarashev, Haibin Zhu, Bank for International Settlements
6 Empirical Assessment of Asset Correlations
Ahmet E. Kocagil, Jing Liu
7 Modelling and Measuring Business Risk
8 An Introduction to Liquidity Risk
Mario Anolli; Andrea Resti
Università Cattolica del S. Cuore; Bocconi University
9 Portfolio Theory in Illiquid Markets
10 Interest Rate Risk on the Banking Book
Andrea Resti and Andrea Sironi
PART III: RISK INTEGRATION AND CAPITAL MANAGEMENT
11 Principles of Risk Aggregation
12 Aggregation by Risk Type and Inter Risk Correlation
13 Risk Aggregation in a Large International Financial Group: A Case Study
Ruben Olieslagers, Patrick Acx
14 Compounding Effects between Market and Credit Risk: The Case of Variable-Rate Loans
Thomas Breuer, Martin Jandačka, Klaus Rheinberger; Martin Summer
PPE Research Centre; Austrian Central Bank
15 Credit Portfolio Stress-Testing and Scenario Analysis
16 Towards Comparable Basel II Ratios: Standard & Poor’s Risk-Adjusted Capital Framework
Bernard de Longevialle, Elie Hériard-Dubreuil, and Thierry Grunspan
Standard & Poor’s
17 Capital Allocation to Business Units and Sub-Portfolios: the Euler Principle
18 Capital Management through Hybrid Capital
Committee of European Banking Supervisors
"Rarely does a book make a more timely appearance. As Pillar II in the New Basel Accord goes to print, bankers and regulators are grappling with the most severe and widespread financial crisis since the Great Depression.
This volume fills a large and glaring gap on the Basel II bookshelf, and should be required reading for both bankers and supervisors involved in the implementation of Basel II"