Basel II: Definition, Purpose, Regulatory Reforms

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Definition of 'Basel II: Definition, Purpose, Regulatory Reforms'

Basel II is a set of international banking regulations that were developed in the wake of the 1997 Asian financial crisis. The goal of Basel II is to improve the regulation, supervision, and risk management of banks.

The Basel II framework consists of three pillars:

* Pillar 1: Minimum capital requirements
* Pillar 2: Supervisory review process
* Pillar 3: Market discipline

Pillar 1 sets out the minimum capital requirements that banks must hold in order to protect themselves against unexpected losses. These requirements are based on a bank's risk profile, which is determined by factors such as the types of assets it holds, the size of its operations, and its geographic location.

Pillar 2 requires supervisors to review banks' capital adequacy and risk management practices on an ongoing basis. Supervisors are expected to take action if they believe that a bank is not adequately capitalized or that its risk management practices are not sound.

Pillar 3 encourages market discipline by requiring banks to disclose information about their capital levels and risk exposures. This information is intended to help investors and other market participants make informed decisions about the risks associated with investing in banks.

Basel II was implemented in stages over a period of several years. The final phase of implementation was completed in 2008.

In the wake of the 2008 financial crisis, there have been calls for a new set of banking regulations, known as Basel III. Basel III is expected to be more comprehensive and risk-sensitive than Basel II. It is also expected to be more closely aligned with the Dodd-Frank Wall Street Reform and Consumer Protection Act, which was enacted in the United States in 2010.

Basel III is still in development, but it is expected to be implemented in stages over a period of several years. The final phase of implementation is expected to be completed in 2022.

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