Basel II, by tying regulatory capital to bank inputs, offers greater transparency about what stands behind the inputs provided by banks and exactly how they are calculated. As I noted earlier, successful institutions understand that calculating internal capital measures is a serious and challenging undertaking, with many moving parts.
Supervisors, through their analysis of bank inputs to Basel II, will develop an even better assessment of institutions’ risk-measurement and riskmanagement practices. Furthermore, the added transparency in Pillar 3 disclosures is expected to provide market participants with a better understanding of an institution’s risks and its ability to manage them.