Basel II Accord further includes credit risk, market risk, operation risk and interest risk into the risks of international banking industry. In addition, the new proposal is based on “three mutually reinforcing pillars”: minimum capital requirements, supervisory review, and market discipline, which requires a more precise reflection to current risks, and further heighten security and stability of financial system.

The First Pillar - Minimum capital standards
The First Pillar of Basel II Accord takes into account credit risk, market risk and operation risk, and provides several approaches for risk measurement accordingly. For the measurement of credit risk, there are two methods proposed, they are standard rating and internal rating. Internal rating is subdivided into junior rating and senior rating. Banks with substandard risk management are advised to adopt standard rating measuring its risks, in which external measurement organizations are involved. Internal rating will not be applied until a more rigorous risk management levels and information disclosures levels are reached. Internal rating allows customized risk factors. Similarly, different levels of approaches for measuring market risks and operation risks are also provided.

The Second Pillar: Supervisory Review
The Basel II Accord sets four key supervisory principles “to ensure that banks have adequate capital to support all the risks in their business and to encourage banks to develop and use better risk management techniques in monitoring and managing their risks.”68 The four principles are as follows: 1. Banks should have a process for assessing their overall capital in relation to their risk profile and a strategy for maintaining their capital levels.69 2. Supervisors should review and evaluate banks’ internal capital adequacy assessments and strategies as well as their ability to monitor and ensure their compliance with regulatory capital ratios. Supervisors should take appropriate action if they are not satisfied with the results of this process? i.e., supervisors can demand that banks maintain a level of capital above the minimum required if they deem it appropriate. 3. Supervisors should expect banks to operate above the minimum regulatory capital ratios and should have the ability to require banks to hold capital in excess of the minimum. 4. Supervisors should seek to intervene at an early stage to prevent capital from falling below the minimum levels required to support the risk characteristics of a particular bank and should require rapid remedial action if capital is not maintained or restored.

The Third Pillar: Market Discipline
Market discipline contributes to strengthened capital supervision, highly secured and stability of financial system. The Basel II Accord sets out disclosure recommendations and requirements in four key areas: scope of application, composition of capital, exposure assessment and management processes, and capital adequacy. The supervision department is best to evaluate disclosure system and take proper actions accordingly. Major disclosure and supplement disclosure are divided in the Basel II Accord. The frequency of disclosure is an important consideration in the promotion of market discipline. The committee confirms its belief that the disclosures should be made on a semi-annual basis. Furthermore, if information on risk exposure or other items is prone to rapid change, then banks are encouraged to also disclose information on a quarterly basis. Banks whose disclosures are not frequently made should make public declaration regarding its policies. The committee encourages a multifaceted information disclosure.