BASEL Essay Example | Topics and Well Written Essays - 750 words

BASEL - Essay Example The Accord outlines a set of standards for establishing minimum capital requirements for banking organizations. It encouraged banks to classify their experiences into broad categories reflecting similar types of borrowers. As an example, all exposures to corporate borrowers are subject to all capital requirements. However, with the advances in risk management practices, technology and banking markets, the 1998 Accord’s approach to measuring capital requirements has become less meaningful. This is why the BASEL have been updated into BASEL II, a consultative document that is believed to provide improved sensitivity to the risks that banks actually face and accommodate improvements in internal processes, more advanced risk measurement techniques and increasing use of sophisticated risk management practices. (Saidenberg, M. and Schuermann, 2005) More accommodating as it appears, the New Accord still has factors which have been pointed out by organizations such as the JCIF (2006) and the BIS (2001) itself that must be considered for determining requirements for market risks and capital standards. The most prominent issue is the improvements of the credit rating process. According to BASEL II, banks are encouraged to implement the internal ratings approach to determine credit capital requirements by using probability of default for borrower rating and loss given default for facility rating. This becomes problematic considering that banks have historically attributed ratings to transactions without separating the two risk factors. Compounding the problem is that banks have tended to rate customers using one or two ratings alone but the Accord specifies that borrowers should be evenly distributed across a minimum number of grades. Banks will find it necessary to re-engineer their internal credit rating system. The Internal Ratings Based approach specifies that credit risk measurement involves