What are the three pillars of Basel Accord?

The three pillars of the new Basel Accord, namely, minimum capital requirements, supervision and inspection by regulatory authorities, and market constraints.

Pillar 1: minimum capital requirements

The minimum capital adequacy ratio requirement remains the focus of the new capital agreement. This part involves the calculation of the minimum total capital requirements related to credit risk, market risk, and operational risk. The minimum capital requirement consists of three basic elements: the definition of capital restricted by regulations, risk-weighted assets, and the minimum ratio of capital to risk-weighted assets. The definition of capital and the minimum capital ratio of 8% have not changed. However, for the calculation of risk-weighted assets, the new protocol further considers the market and operation risks based on the credit risk. The total risk-weighted assets are the risk-weighted assets calculated from the credit risk, plus the risk-weighted assets calculated based on market risks and operational risks.

Second pillar: Supervision and Inspection by regulatory authorities

The supervision and inspection by regulatory authorities aims to ensure that banks establish reasonable and effective internal assessment procedures to determine the risks they face and to assess whether their capital is sufficient. The regulatory authorities should supervise and inspect the Bank's risk management and resolution status, the handling of the relationship between different risks, the nature of the market, the effectiveness and reliability of earnings, and other factors, to fully determine whether the bank's capital is sufficient.

In the process of implementing supervision, foreign exchange rebates experts have investigated and should follow the following four principles:

First, banks should have a complete set of procedures to assess total capital in line with their risks, and a strategy to maintain the capital level.

Second, the regulatory authorities should inspect and evaluate the assessment of the Bank's internal capital adequacy ratio and its strategy, as well as the Bank's ability to monitor and ensure compliance with the regulatory capital ratio; if they are not satisfied with the final result, the regulatory authorities should take appropriate, though.

Third, regulatory authorities should expect banks to have higher capital than the minimum capital regulatory standard, and should have the capacity to require banks to hold higher than the minimum standard of capital.

4. regulatory authorities should seek early intervention to prevent banks from having lower capital than the minimum level required to withstand risks; if not protected or recovered, immediate remedial measures should be taken.

The third pillar: market constraints

The core of market constraints is information disclosure. The effectiveness of market constraints depends directly on the degree of perfection of the information disclosure system. Only by establishing a sound banking information disclosure system can market participants assess the Bank's risk management status and liquidity. The new agreement points out that market discipline has potential roles in strengthening capital supervision and improving the security and stability of the financial system, in addition, qualitative and quantitative information disclosure requirements are put forward in four aspects: Application Scope, capital composition, risk disclosure evaluation and management process, and capital adequacy ratio. For general banks, information disclosure is required every six months; for large banks that are active in the financial market, information disclosure is required quarterly; for market risks, relevant information must be disclosed after each major event.