In addition, the measurement of credit risk will be fine-tuned substantially. Under Pillar 1, the risk sensitivity of minimum risk-based capital requirements is much greater than under the current Accord. This greater sensitivity would be achieved by linking each banking organization’s capital requirement to measures of credit and operational risk, as determined by risk parameters estimated by each organization. However, Basel II offers options.
In a departure from the original draft, the most important issues for Germany were successfully anchored in that compromise. In particular, the strict German methods for calculating real estate risks are now recognised as risk-reducing, and the degrees of freedom for those calculating risk with internal models have been preserved to a considerable extent.