Pillar 2 of the new accord provides a consistent framework for improving supervisory assessments of capital adequacy and risk management. Under pillar 2, a bank would be required to maintain capital in excess of the regulatory minimums to capture the full set of risks to which the bank is exposed.
Upside risks include more significant pass-through from a weaker peso down the road, as well as the resurgence of spikes in noncore inflation prices and eventual aggregate demand pressures. Close monitoring of these risks is all-important in view of the fact that analysts’ long-term inflation expectations remain above the 3 percent target. Sustained convergence with the target must be consolidated.