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Effective management of risk has always been the focus area for banks owing to the increasing sophistication in the product range and services and the complex channels that deliver them. This makes it imperative for banks to adopt sophisticated risk management techniques and to establish a link between risk exposures and capital.
Basel II is intended to improve safety and soundness of the financial system by placing increased emphasis on banks' own internal control and risk management processes and models, the supervisory review process, and market discipline. Indeed, to enable the calculation of capital requirements under the new Accord requires a bank to implement a comprehensive risk management framework. Over a period of time, the risk management improvements that are the intended result may be rewarded by lower capital requirements. However, these changes will also have wide-ranging effects on a bank's information technology systems, processes, people and business, beyond the regulatory compliance, risk management and finance functions.
Basel II also encourages the ongoing improvements in risk measurement, assessment and mitigation. Thus, the new Accord presents banks with an opportunity to gain competitive advantage by allocating capital to those processes, segments, and markets that demonstrate a strong risk/return ratio.
The Mid-term Review of Annual Policy for the Year 2006-07 from the Reserve Bank of India (RBI) revealed that the intended date for adoption of Basel II, i.e., March 31, 2007, had to be postponed by two years, taking into consideration the state of preparedness of the banking system in the country. |
