Basel II

By: Kari Michel

What is Basel II?  Basel II is the international convergence of Capital Measurement and Capital Standards. It is a revised framework and is the second iteration of an international standard of laws. The purpose of Basel II is to create an international standard that banking regulators can use when creating regulations about how much capital banks need to put aside to guard against the types of financial and operations risk banks face.  Basel II ultimately implements standards to assist in maintaining a healthy financial system.

The business challenge

The framework for Basel II compels the supervisors to ensure that banks implement credit rating techniques that represent their particular risk profile.  Besides the risk inputs (Probability of Default (PD), Loss Given Default (LGD) and Exposure at Default (EAD)) calculation, the final Basel accord includes the “use test” requirement which is the requirement for a firm to use an advanced approach more widely in its business and met merely for calculation of regulatory capital.

Therefore many financial institutions are required to make considerable changes in their approach to risk management (i.e. infrastructure, systems, processes, data requirements).  Experian is a leading provider of risk management solutions — products and services for the new Basel Capital Accord (Basel II).  Experian’s approach includes consultancy, software, and analytics tailored to meet the lender’s Basel II requirements.