Basel II is a framework made specifically for banking organizations to improve risk management. The first Basel Accord was released way back in the year 1988. It was about time the framework was revised since it did not cater to the diverse and dynamic scenario in which banks and financial institutions work today. From a layman's point of view, Basel II Capital Accord tries to align the amount of capital kept on the bank's balance sheet with the risks associated with disbursing loans. The Basel II framework contains three pillars which define the entire framework. The three pillars of the Basel II framework are

Pillar 1 defines an intitution's capital requirements. Pillar 1 sets out the minimum capital standards for a bank. Both credit risk as well as operational risk are covered under this pillar.

Pillar 2 defines and sets out a regulatory review process. Such onsite supervisory review is prescribed for all banks covered under Basel II. Such review process is often termed as the CAAP Capital Allocation Assessment Process.

Pillar 3 sets out disclosure requirements and caters to market discipline issues.

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