Basel II places a firm emphasis on taking a risk-based approach to supervision. Banks are expected to conduct their own internal assessments of risk and capital adequacy. Supervisors, in turn, are expected to regularly review these assessments. The intent is not to have supervisors functioning as bank management. Rather, supervisors should evaluate the degree to which a bank has a sound internal process in place to assess capital adequacy. This assessment should take into account not only credit and market risk, which are part of the current capital framework, but also other critical risks such as interest rate risk in the banking book and credit concentration risk. In addition, banks are expected to manage and hold minimum regulatory capital against their exposures to operational risk, which is the risk of losses stemming from failures in internal processes or systems or from external disruptions. Indeed, we have found that some of the largest bank losses in recent years have been the result of operational loss events. Responsiveness to rapid changes in the financial sector Seventh, Basel II is an evolutionary framework that is responsive to recent trends in the financial sector and capable of adapting to future changes. Technological advances and institutional developments have provided for more mature financial markets and more reliable and efficient payment systems. The banking business has grown more sophisticated, in large part as a result of technological progress. Technology allows banks to offer solutions which not only provide a more individualised approach to customers, but also allow banks to operate more efficiently.
4/4  BIS - Central bankers' speeches