edgar meister : pillar 2 in basel ii - supervisory implications and implementation in germany presentation by mr edgar meister, member of the executive board of the deutsche bundesbank, at a seminar at the bank of russia “ the supervisory implications of basel ii ”, moscow, 20 april 2005. * * * ladies and gentlemen, it is a great pleasure for me to be invited to this seminar and to share with you some thoughts on the challenges of implementing pillar 2, also called the supervisory review process ( srp ) of the new basel ii framework. as madame nouy elaborated this morning the framework comprises overall three pillars : pillar 1 is covering the minimum capital requirements set by supervisors, pillar 2 is focusing on banks ’ internal capital assessment and pillar 3 is addressing market discipline and disclosure. a significant innovation of basel ii is the greater use of banks ’ own, internal methods for calculating regulatory capital requirements. for example, institutions get the possibility to use internal ratings for the measurement of credit risk as inputs to regulatory capital calculations. of course, in order to ensure the integrity of internal methods banks have to comply with a number of qualitative requirements. correspondingly, it is the task of each supervisor to develop review procedures for ensuring banks ’ compliance with those qualitative requirements to make sure that banks ’ systems and controls are adequate. the challenge for supervisory authorities is how to implement the new standards in their existing supervisory regimes. before i start presenting to you how the german supervisory authorities cope with this task, which is the second part of my speech, let me first recall the key principles of pillar 2. i as you are all aware of, there are two sources of international requirements to be recognized by all eu member states : the basel committee ’ s framework paper, which constitutes the supervisory review process in its second pillar, on the one hand and the draft eu directive, putting basel ii into force within the eu, on the other hand. the basel ii document, addressing internationally active banking groups, sets up the supervisory review process by means of four key principles. whereas principle 1 contains provisions banks have to comply with, principles 2 to 4 create standards for supervisory authorities. to start with the banking side, principle 1 states : principle 1 : banks should have a process for assessing their overall capital adequacy in relation to their risk profile and a strategy for maintaining their capital levels. in brief this is called the internal capital adequacy assessment process ( icaap ). in contrast to pillar 1,

us, and the opportunities before us, for further solid progress. and let us not forget that, whilst the west debates the merits and demerits of the anglo - saxon, the swedish and the japanese finance models, to get them out of the current disaster zone, we here in africa are refining our own african model. our model has served us well to avoid our economies being sucked into the maelstrom of the western self - made crisis. so, as we are getting well on the way to our own economic union, and things are looking up, we can truly boast : now africa is going places! let us keep moving. and enjoy the ride. thank you very much for your attention.