As far as the second pillar is concerned, the supervisory review process aims at helping banks develop better risk management techniques and capital management. Capital targets are set and internal assessment procedures are encouraged. Likewise, supervisors can arbitrate for issues that they deem appropriate.
Talking in terms of the third pillar, disclosure recommendations and bank requirements are made and it is decided on the basis of materiality as to which disclosures can be made.
The Basel Accord has been criticized at a number of occasions as it is argued that institutions may resort to haphazard lending where expected returns are higher than regulatory costs so that regulatory capital is maintained at an equal level with economic capital (Value at Risk 59). It has also paved way to the deterioration of the loan books’ credit quality due to securitization according to which loans can most readily be transformed into tradable securities or moved into trading books. As a result the capital requirement is lowered
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