Market Discipline - Basel II

Basel II

Basel II is a banking supervision accord in its final version as of 2006. It describes and recommends the necessary minimum capital requirements necessary to keep the bank safe and sound. It consists of three pillars to this aim:

  1. Minimum (risk weighted) capital requirements
  2. Supervisory review process
  3. Disclosure requirements

The third pillar requires the bank activities to be transparent to the general public. For this, the bank is supposed to release relevant financial data (financial statements etc.) in a timely fashion to the public, for example, through its webpage. This might enable depositors to better evaluate bank condition (i.e. bank probability of failure) and diversify their portfolio accordingly. As such this pillar by itself is believed will enhance the role of market discipline in financial markets.

Read more about this topic:  Market Discipline

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