Basel II

Pillar 1: Minimum capital requirements

Compliance with the capital requirements under Basel II (from end-2006) will be gauged as now by the so-called capital coefficient, which must amount to at least 8%.

While no change is envisaged at present for the definition of capital and the minimum capital coefficient of 8% is also to remain unchanged, the current risk categories of credit risk and market risk are being supplemented by a third risk category – operational risk – which in future will have to be explicitly backed by capital.

The innovations relate to improvements in risk measurement, ie the computation of the denominator for the capital ratio. The measurement methods for credit risk are more sophisticated than under the current Accord. For the first time a measure is also being proposed for operational risk, whereas the measure for market risk is to remain unchan ged. Two different approaches to measuring credit risk are proposed: a standardised approach and an internal ratings-based approach (IRB).

The measurement of the minimum capital requirements is based on an average assessment of risk dispersion in the banking sector and therefore does not correspond in every case to the specific circumstances of individual institutions. Credit institutions will therefore be expected to maintain more capital than computed under the minimum capital requirements if this is called for by their individual risk situation.

The reason for revising regulatory capital was not just to adapt it to market developments but also to take account of the different level of sophistication of risk management at the individual banks. Both standard and advanced risk measurement methods are envisaged in the context of an evolutionary approach. The transition to the prudential use of more precise methods is to be "rewarded" by a moderate reduction in the capital requirements. This gives banks an incentive to further refine their internal risk management methodologies within the various risk categories.