Effective risk management strategies can be implemented by integrating effective bank-level management, operational supervision and market discipline. It is also imperative for financial institutions to update their risk management practices in accordance with prevalent legislation and regulatory environment. With these aspects in mind, the Basel Committee on Banking Supervision published the Capital Adequacy Accord, also known as the Basel Accord, in 1988. The Basel Accord defined the parameters of risk management and capital adequacy for Financial Service Providers (FSPs). With the growth in the financial services sector, the Committee felt the need to update the Accord in line with new developments. As a result, it proposed the New Basel Capital Accord, also known as Basel II, in June 1999. With its new risk-sensitive framework, Basel II aims to fill the gaps left by the previous Accord. Basel II was devised to improve the soundness of the financial system by aligning regulatory capital requirement to the underlying risks of the banking industry. It encourages banks to conduct better risk management and enhance market discipline. According to the Committee, financial institutions should integrate Basel II in their operations by the year-end 2006. Efficient risk management, as outlined by Basel II, can be ensured by leveraging information technology. A more coherent architecture, would be required for process automation and integration, and cost reduction mechanisms. The chapter discusses Basel II, its framework and its impact on financial organizations.
AN OVERVIEW
Financial markets have always been sensitive towards incurring heavy losses due to either poor risk management policies or frauds ? as both would reduce public confidence, which is the mainstay of th ...