Resources for Basel II Capital Accord (Basel II)

A V Rajwade: Pillars of clay

www.business-standard.com

Northern Rock is a case study of how weak and ineffective the three pillars of banking supervision are.

Banks are central to the functioning of a modern economy: they are, in many ways, �special�. One manifestation of this is the fact that, for a long time, no major bank has been allowed to fail in economies (and political systems) as diverse as the US, Japan and China. The authorities always prefer to punish the tax-payer by rescuing banks with public money, rather than allow the depositors to lose. The latest example is that of Northern Rock in the UK, recently rescued by the authorities. Bank of England�s funding to Northern Rock has already amounted to �25 billion.

This incident emphasises how fragile the pillars of banking supervision are. Keeping banks solvent is at the heart of the elaborate framework prescribed by the Basel Committee on Banking Supervision. Basel-II, as it is popularly known, is a structure built on three pillars: minimum capital requirments; supervisory review; and market discipline.

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