This will give incentives for banks to hedge credit portfolio risks. The incorporation of operational risk under pillar 1 is also a significant step, which recognizes operational failures that banks should seek to minimize. In addition, strong capital helps banks to absorb unexpected shocks and the minimum regulatory capital that accurately reflects the bank’s risk profile provides more effective triggers for prompt corrective actions.
Under Pillar 2: Banks will be required to maintain a capital cushion above the regulatory minimums to capture the full set of risks to which the bank is exposed. These include liquidity risk, interest rate risk, concentration risk and other risks which are not captured under pillar 1.