Basel ll - Use the right financial and business management solution to ensure your business is compliant. from Peracto Solutions IThound

Basel ll - Use the right financial and business management solution to ensure your business is compliant.
by Peracto Solutions
Published:December 2007
Format: Portable Document Format (.pdf)
Length: 16 pages
Overview

Basel ll was ratified by the Bank of International Settlements (BIS), an international organization that promotes cooperation among central banks and other agencies, with the goal of establishing monetary and financial stability. Within the BIS, a group called the Basel Committee was charged with the task of creating the accord. The committee has since published a revised framework agreement that aims to make the international financial system safer and more flexible by requiring that the riskiness of banks' loan portfolios be reflected in the capital charges they need to set aside against unexpected losses.

The agreement—Basel II—sets a framework for banking practices with three pillars: minimum capital requirements, supervisory review process, and market discipline. It prescribes a policy for adopting more risk-sensitive minimum capital requirements for banking organizations.

The effects of Basel ll on the finances of small to midsized sized businesses are passive. These effects are due to the nature of Basel II’s first pillar, which focuses on the identification of risk classes and the allocation of minimum capital requirements based on the amount of weighted assets within each risk class. In the broader context of financing for the small to midsize businesses sector, banks often assess small to midsize businesses as undercapitalized. They subsequently face problems raising debt financing and in obtaining risk capital or subordinated debt.

The first pillar seeks to align banks’ capital allocation with the risk characteristics of a bank’s lending practices, therefore causing concerns in the small to midsize business sector that the regulations will increase the cost of borrowing or impose more difficult hurdle criteria. Banks are paying more attention to the relative riskiness of their clients. To estimate the risk of their corporate clients, banks need more information than before. For small to midsize businesses that will need to contact a bank or another lending institution regarding finance, recognizing and addressing this key issue may aid in securing the right financing at the best interest rates. Small to midsize businesses that can demonstrate their fiscal stability may in turn expect lower interest rates and better access to loans. Small to midsize businesses that are more financial risk are more likely to encounter higher interest rates and collateral requirements.

Businesses need to convince banks that they are taking an acceptable risk and will therefore pay a reasonable return on financing provided to them. It is important that business customers understand the new rules of the game and how they can prepare themselves for evaluation. The following white paper shows features with in Microsoft Dynamics can aid in this process.

Go to White Paper

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