In summary, the Basel II framework consists of three mutually reinforcing pillars. Under Pillar 1, the framework allows for a continuum of approaches for computing regulatory capital in respect of credit, market and operational risks. The measurement approaches range from simple to advanced methods. The simple methods are standardised methods which are prescribed by supervisors whereas the advanced approaches are based on the use of a bank’s
own internal models.
To this extend, the Revised Framework narrows the gap between regulatory capital as set by regulatory authorities and economic capital, as measured by the bank’s internal models.