Editing Basel II (section)

=== The first pillar: Minimum capital requirements ===

The first pillar deals with maintenance of regulatory capital calculated for three major components of risk that a bank faces: [[credit risk]], [[operational risk]], and [[market risk]]. Other risks are not considered fully quantifiable at this stage.

# The [[credit risk]] component can be calculated in three different ways of varying degree of sophistication, namely [[Standardized approach (credit risk)|standardized approach]], [[Foundation IRB]], [[Advanced IRB]]. IRB stands for "Internal Rating-Based Approach". 
# For [[operational risk]], there are three different approaches – [[basic indicator approach]] or BIA, [[Standardized approach (operational risk)|standardized approach]] or TSA, and the internal measurement approach (an advanced form of which is the [[advanced measurement approach]] or AMA).
# For [[market risk]] the preferred approach is VaR ([[value at risk]]).

As the Basel II recommendations are phased in by the banking industry it will move from standardised requirements to more refined and specific requirements that have been developed for each risk category by each bank. The upside for banks that do develop their bespoke risk measurement systems is that they will be rewarded with potentially lower risk capital requirements. In the future, there will be closer links between the concepts of economic and regulatory capital.