Carmen Schotten's picture

Basel II is the second accord issued by the Basel Committee on Banking Supervision and contains all the capital requirements designed to protect financial systems from the consequences of bank collapses and mismanagement. Under an EU Directive, these rules apply to all banks and financial services institutions with effect from January 2007.

The need to regulate banks arose from failures and liquidity problems affecting banks and financial services providers as a result of granting unsecured loans or failing to perform proper credit checks. The aim is to minimize the danger that loans will become non-performing or are too risky.
By evaluating and reviewing their risks when granting loans, banks can better assess their capital requirement.

Basel II differentiates between credit risk, market risk, and operational risk.

Assessing credit risk enables protection against expected losses, for example via risk premiums, and against unexpected losses via capital reserves.

Banks must also assess and hedge against market risk, such as exchange and interest rate fluctuations.

At the same time, it is essential that operational risk, such as indirect or direct losses, is identified, documented, and evaluated. These losses can be caused by inadequate or non-existent control systems, people (e.g., fraud, misunderstandings), IT systems (transaction or system errors), or external events.

Some of these risks can be minimized by taking out insurance, others by introducing a financial control system. This internal control system can also be used to support compliance with other regulations, such as SOX or the institute’s own rules.

Basel II implementation and compliance provides financial services providers with a measurable security standard for granting loans. Banks can demonstrate that they are engaging in effective risk management to protect the company, their customers, and the financial system.

ARIS Solution for Governance, Risk & Compliance Management (ARIS GRC) helps financial services providers to implement guidelines and regulations. It enables you to document your business processes and design and operate a risk management system. You can demonstrate to regulatory authorities and auditors that you conduct regular audits/tests and risk analysis and that appropriate measures are in place to minimize credit risk.

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