Question: What is the Basel Committee?
Answer: A committee of central banks and bank supervisors/ regulators from the major industrialised countries that meets every three months at the Bank for International Settlements in Basel. The Basel Committee consists of senior supervisory representatives from Belgium, Canada, France, Germany, Italy, Japan, Luxembourg, Netherlands, Sweden, Switzerland, United Kingdom and the United States. It usually meets at the Bank for International Settlements in Basel, where its permanent Secretariat is located.

Question: What is the significance of its papers?
Answer: They provide broad policy guidelines that each country's supervisors can use to determine the supervisory policies they apply. Some papers, such as the Capital Accord and the Core Principles, are drafted in the expectation that they will be followed more closely by supervisors world-wide.

Question: Will it be obligatory to apply the New Accord?
Answer: The present package, when finalised, will establish the basic capital frameworks for Committee member countries and the Committee expects that it will also be adopted by supervisors across the world, as the current Accord is. There has already been extended consultation with supervisors around the world and this will continue in the coming months. In addition, the International Monetary Fund and World Bank use the Basel Committee's standards as a benchmark in conducting their missions.

Question: Will the financial system be safer if this proposal goes forward?
Answer: The Committee expects that the New Accord will enhance the soundness of the financial system by aligning regulatory capital requirement to the underlying risks in the banking business and by encouraging better risk management by banks and enhanced market discipline.

Question: Will banks need to hold more or less capital under the New Accord?
Answer: Banks with a greater than average risk appetite will find their capital requirements increasing, and vice versa. The intention is to leave the total capital requirement for an average risk portfolio broadly unchanged.

Question: What is the relationship between the Basel Committee and the BIS?
Answer: The BIS (Bank for International Settlements) is a bank owned by and serving central banks, and its premises are frequently used for international meetings of financial officials. However, apart from hosting the meetings and providing Secretariat support, the BIS itself does not participate in the process of determining Basel Committee policy. For more information about BIS, please refer to the web-site of BIS

1. First, the new Accord abandons the one-size-fits-all approach and provides a menu of options from which banks can choose.

2. Second, the new Accord adopts more risk sensitivity, and hence more complex measurement techniques.

3. Third, the consultative package incorporates descriptions of works in progress, which will be streamlined in the final package.

Question: Will banks be able to remain on the present system if they wish?
Answer: The Committee expects supervisors to start applying the new framework to internationally active banks from 2004. Those banks that choose its simpler options, however, may continue to calculate capital requirements in a way broadly similar to the current Accord.

Question: How does the banking industry interact with the Basel Committee?
Answer: All major initiatives affecting banks are developed after active consultation with the industry, principally at the national level. Our sense is that major banks want to operate within a regulatory environment in which their international competitors are subject to similar rules, wherever they operate.

Question: If the old Accord is so outdated, why has it not been replaced earlier?
Answer: There already have been several amendments to the 1988 Accord, reflecting the changing dynamics of financial markets. About two years ago, the Committee decided that more fundamental changes were needed to respond to technological developments and new instruments in the market. The banking industry is only now acquiring the technical ability to measure credit and operational risk in the manner envisaged in the new proposal. Considerable efforts will be needed in the coming two years by banks and supervisors to acquire the necessary skills to implement the new Accord.

Question: Are banks expected to disclose all the information listed under Pillar 3?
Answer: The paper is consultative and most of the disclosures suggested are recommendations, not requirements. However, as in other aspects of the Accord, the more complex the methods used by banks, the stricter the standards supervisors will wish to enforce.

Question: How does the revised proposal differ from the June 1999 proposal?
Answer: The basic concepts and the design remain the same, but the revised package has a far more concrete character. The major changes include:

• For the standardised approach to credit risk measurement, the risk buckets for corporate exposures have been more closely aligned to the underlying risk, and banks and corporates can now receive a more favourable risk weight than their sovereign.

• For the IRB (internal ratings based) approach to credit risk measurement, two options (foundation and advanced) are provided so that the IRB approach is now capable of being used by many more banks.

• For the measurement of other risks, Pillar One now focuses on operational risk.

• Far more specific criteria have been provided for Pillars 2 and 3.

• Pillar 1: The rules that define the minimum ratio of capital to risk weighted assets.

• Pillar 2: The supervisory review pillar, which requires supervisors to undertake a qualitative review of their bank's capital allocation techniques and compliance with relevant standards.

• Pillar 3: The disclosure requirements, which facilitate market discipline.

• Internal Ratings: The result of a bank's own measure of risk in its credit portfolio.

• External Credit assessments: Ratings issued by private or public sector agencies

• Consolidation:: The measurement of a bank's risk on a group-wide basis.

• Operational Risk: The risk of direct or indirect loss resulting from inadequate or failed internal processes, people and systems, or from external events.

• Credit Risk: The risk of loss arising from default by a creditor or counter-party.

• Market Risk: The risk of losses in trading positions when prices move adversely.

• Credit Risk Mitigation: A range of techniques whereby a bank can partially protect itself against counter-party default (for example, by taking guarantees or collateral, or buying a hedging instrument).

• Asset Securitisation: The packaging of assets or obligations into securities for sale to third parties.
  [ Source: Website of Basel Committee - www.bis.org]