Development and Implementation
The first draft of Basel 1 was introduced in December 1987 and was approved by the G10 countries in 1988, published under the name Basel Capital Accord.
Basel 2 comprises the recommendations for capital adequacy of banks and financial institutions, issued by the Basel Committee on Banking Supervision (BCBS). According to the EC-directive 2006/49/EC the member countries of the European Union are obliged to apply these regulations by 1 January 2007. Erste Group Bank AG complies with the disclosure regulations of the Basel 2 framework by the publication of qualitative and quantitative information since January 1, 2007.
On 16 April 2013, the European Parliament adopted the new capital and liquidity requirements for the implementation of
Basel 3 in the European Union. On 27 June 2013, the final Capital Requirements Directive IV (CRD IV) was published in the Official Journal of the European Union and enacted in the Capital Requirements Regulation (CRR), in various technical standards (ITS) issued by the European Banking Authority (EBA) as well as in national law by the Austrian Banking Act. The application of the new regulatory requirements for credit institutions and investment firms became effective as of 1 January 2014. From then onwards, the regulatory capital (own funds) and the regulatory capital requirements have been calculated and published in accordance to the CRR.
The three Pillars
The three Pillars were introduced for the first time under Basel 2. The objectives of this framework are:
a more risk sensitive capital allocation (Pillar 1 - Minimum Capital Requirements),
a more detailed regulatory assessment of risks associated with credit exposure (Pillar 2 - Supervisory Review Process) and
an increased market transparency (Pillar 3 – Market Discipline). Basel 3 extends the outreach of those requirements.
Pillar 1 – Minimum Capital Requirements
The first pillar deals in general with capital, risk coverage and containing leverage.
Pillar 2 – Supervisory Review Process
The second pillar requires banks to conduct an Internal Capital Adequacy Assessment Process (ICAAP) to demonstrate that they have implemented methods and procedures to safeguard adequate capital resources with adequate attention to all material risks. The ICAAP supplements Pillar 1’s minimum regulatory requirements. It considers a broader range of risk types and the bank’s risk and capital management capabilities. Furthermore, Pillar 2 requires regulators to conduct a Supervisory Review and Evaluation Process to assess the soundness of bank’s ICAAP and take any appropriate actions that may be required.
Pillar 3 – Market Discipline
Taking account of Pillar 1 and Pillar 2, Pillar 3 aims to increase market transparency by providing information on the scope of application, regulatory capital, risk positions, risk measurement approaches and as a result, the capital adequacy of a bank. Moreover details about the reconciliation of the regulatory capital to the capital according to IFRS accounting figures are required.
