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Background on Basel II
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In 1988 the Bank for International Settlements’ Basel Committee on Banking Supervision,
commonly known as the Basel Committee, imposed the Basel Capital Accord. The Basel
Capital Accord introduced a system for implementing a credit risk framework for
determining the minimum amount of capital that a bank must hold as a cushion against
risks. The Basel Capital Accord was adopted over time not only in member countries,
but in virtually all countries operating international banks.
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One problem with the original Basel Capital Accord was that it took a "one size
fits all" approach, without regard for the actual operational risk incurred by the
bank. In 2004, the Basel II Accord was established. The new accord aligns the requirement
for capital on hand with the actual risk involved, providing an incentive for banks
to improve risk management.
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Managing Risk
Operational risk is a broad term that applies to various types of risk, the most
crucial of which involve a breakdown in either internal controls or corporate governance.
Other areas that introduce operational risks are information technology and catastrophes
such as fires, floods or earthquakes. These operational risks can lead to significant
financial losses for the bank.
If not properly mitigated and managed, these risks can introduce opportunities for
loss. It may be direct fraud or error, or it could be a bank representative or officer
exceeding their authority and conducting illegal or unethical transactions. If the
proper framework is in place, these operational risks are reduced and the bank can
be considered to be more secure under the Basel II guidelines.
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For complete information on Basel II, visit
The Bank for International Settlements website
