You Should Know Basel II Compliance Mandates to Prepare Your Firm's Risk Management Process

Originally created in June 2004, Basel II mandates were created by the Basel Committee on Banking Supervision. While Basel II requirements have been superseded by Basel III requirements, which will take place in 2013, the requirements of Basel II are still important and should be noted by any financial firm or bank that intends on making an operational risk strategy.

The Three Pillars

Basel II requirements came in three major pillars, each of which banks were expected to come into compliance with. These pillars were all about how banks manage their risks; credit risk, market risk and operational risk. The pillars told banks and institutions how to deal with risk, gave banks tools to deal with risk, and set out specific guidelines that these businesses need to follow regarding disclosure of their assets, their risks and all other aspects of their business to investors as well as to the public. If properly followed these requirements would lead to a steadier bank that could overcome market shake ups.

Risk Management and Compliance

Even if you don't have to comply with the rules and regulations set out by this list, it offers good, solid and actionable steps that businesses can take to move ahead through bad economic times.

These requirements were created by some of the most learned bodies and individuals in the business and banking industry to deal with the trials and tribulations that future markets would bring. However they went largely ignored in America until the collapses and burst bubbles of 2008. After that the environment changed drastically, endorsing and support many of the policies that dealt with controlling risk and ensuring that banks and lending institutions had to offer full disclosure of what was happening to anyone investing in them. A policy that may not have prevented, but certainly would have slowed the damage being done by credit default swaps, sub-par mortgage lending and dozens of other unsavory and predatory practices.

The Future and Basel III

While these requirements have been around since 2004, in 2013 more requirements are being issued in the form of Basel III agreements. Basel III, unlike II, focuses on the amounts of money that an institution has to keep on hand in order to prevent being taken by surprise in the event of poor market downturns or collapses. Many of these rules will supersede the old standards, but many of them will simply add new requirements.

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