More NewsFitch Report Welcomes Basel II’s Risk Sensitive Approach

Fitch Report Welcomes Basel II's Risk Sensitive Approach

Fitch’s report on the Basel II capital framework provides guidance for investors and analysts to understand the new Basel II credit risk measures. In a statement, the rating agency said that Basel II, which was finalized in June, is a major step in regulation that will promote stronger risk management and disclosure practices within the banking industry. One of the important innovations in Basel II is the internal-ratings based (IRB) approach to measuring regulatory capital for credit risk, which harnesses advanced risk measurement techniques. Fitch believes that these measures will be a helpful tool in evaluating a bank’s capital adequacy, particularly when combined with an analysis of other important risk drivers, such as portfolio concentration. Fitch welcomes the greater risk-sensitivity of the Basel II framework and believes it will provide a better yardstick of a bank’s capital relative to its risk profile. A by-product of greater risk-sensitivity is that the IRB measures could fluctuate significantly over time, improving in a robust economy but declining during a downturn.

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