This post is intended mainly for Bankers who are planning to work in the Risk Management Department. The performance monitoring of Basel is dependent on 3 pillars. You may ask me a question why it is not 4 pillars. Anyways, let us know how these pillars are expected to protect the Banking system from systematic risk.

 

Pillars	Their Descriptions and Importance
Pillar – I	Under Pillar – I, Banks need to identify the risks in their credit / lending portfolio, Investments portfolio and Operational areas. After identification of the risks, each type of risk is given certain weight. Then multiply each asset with the respective risk weight and arrive the risk weighted assets. These risk weighted assets are compared with available Regulatory Capital (Repeat the word – Regulatory Capital).
Pillar – II	Apart from the risks in their lending portfolio, Investment portfolio and operational areas, the Banks will also have risks in other areas. For example, the Bank may have a liquidity risk. Basically, any risks that are not identified in the Pillar – I, are to be identified and the Banks have to assess how much capital is required under this pillar. If any Bank has not identified or unable to identify those risks, the Central Bank of the country identifies those risk and instructs the Banks to keep certain amount of capital for those identified risk.
Pillar – III	Once all the risks are identified and capital assessment is done through Pillar – I and Pillar – II, the Banks are expected to disclose the relevant risks and the available regulatory capital to all the market participants like equity holders, regulatory bodies, or any other stakeholder.

We will learn about how these pillars work in practical manner in the coming weeks.

 

Regards..