Pillar II - Supervisory and Review Process

The second pillar of Basel 2 intends to ensure the presence of sound processes at each bank. This pillar would also provide the framework to assess the adequacy of the bank’s capital, based on a thorough evaluation of its risks. The Basel 2 framework emphasizes the development of an internal capital assessment process by the bank management. Additionally, management should set targets for capital corresponding with the bank’s risk profile and control environment. Regulatory and supervisory bodies (either the Central Banks, or bodies setup by the Central Bank or Government, for regulation and control) will review internal process. This is done so that an assessment of the bank’s capital adequacy in relation to its risks can be made.

A point to note is that compliance with internal measurement methodologies, mitigation policies of credit risk, and securitization policies for minimum qualifying standards are subject to supervisory control. The supervising authority will also be responsible for reviewing operations & processes in trading, Internet banking and security processing.

Benefits of the Second Pillar

The implementation of the second pillar demands increased interaction between bank managers and supervisory bodies. This increased level of interaction enhances the level of transparency within the organization. The Second pillar helps achieve a higher level of security within the organization. A level of standardization and conformity is established across the enterprise. This in turn helps achieve higher returns with lower risk.