Basel II is a set of regulatory rules issued by the Basel Committee on Banking Supervision for the field of banking.
The purpose of capital adequacy rules (the ability to absorb risk) is to ensure the stability of the banking sector. Banks should be sufficiently strong and able to overcome temporary adverse financial results. This requires that each bank is sufficiently capitalized. Indeed, if there is a loss, it should have enough capital to absorb losses and prevent its ruin.
Adjustment of capital adequacy under Basel II is the minimum required level of capital to the amount of assets and risk of the bank. This minimum rate is set at 8%.
The minimum capital of the bank is determined by the degree of risks that the bank is exposed. It is expressed by risk-weighted assets (RWA). When calculating risk-weighted assets, there are three types of risk taken into account: credit risk, market risk and operational risk. Banks with an equal volume of total assets may have different amounts of capital that must be held. The riskier the assets, the more capital they must have, and vice versa.
Some shortcomings in the Basel II were added to the standard Basel III.
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