White Papers for Basel II Capital Accord (Basel II)

Basel II A new capital framework

Financial Stability Department

This article provides an introduction to the new Basel II Capital Framework (Basel II) and the Reserve Bank’s approach to
its implementation in New Zealand. Bank capital plays an important role in absorbing unexpected losses. Regulators
have an interest in the amount of capital held by banks and set some minimum capital adequacy requirements for banks.
Basel II replaces the current regulatory requirements and provides a new framework for thinking about capital’s role in
banking and how capital requirements should be calculated. The main objectives of Basel II are to increase the sensitivity
to risk of regulatory capital requirements, and to provide incentives for banks to enhance their risk-management systems
and processes. The Reserve Bank is responsible for setting regulatory capital requirements for banks incorporated in
New Zealand. For locally-incorporated banks that also have operations overseas, the Reserve Bank liaises closely with
the relevant foreign supervisors to ensure a smooth and efficient implementation and operation of the rules in New
Zealand.

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