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¡¡¡¡The Basel II Framework describes a more comprehensive measure and minimum standard for capital adequacy that national supervisory authorities are now working to implement through domestic rule-making and adoption procedures. It seeks to improve on the existing rules by aligning regulatory capital requirements more closely to the underlying risks that banks face. In addition, it is intended to promote a more forward-looking approach to capital supervision, one that encourages banks to identify the risks they may face, and to develop or improve their ability to manage those risks.¡¡

¡¡¡¡Basel II uses a "three pillars" concept - (1) minimum capital requirements, (2) supervisory review and (3) market discipline - to promote greater stability in the financial system. The Basel I accord dealt with only parts of each of these pillars. For example: of the key pillar one risk, credit risk, was dealt with in a simple manner and market risk was an afterthought. Operational risk was not dealt with at all. ¡¡

¡¡¡¡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. The second pillar deals with the regulatory response to the first pillar, giving regulators much improved 'tools' over those available to them under Basel I. It also provides a framework for dealing with all the other risks a bank may face, such as reputation risk, liquidity risk and legal risk, which the accord combines under the title of residual risk. The third pillar greatly increases the disclosures that the bank must make. This is designed to allow the market to have a better picture of the overall risk position of the bank and to allow the counterparties of the bank to price and deal appropriately. It can be illuminated by the chart below. ¡¡

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¡¡¡¡Hence the new Basel Capital Accord comprises three mutually reinforcing pillars with a view to better safeguarding the stability of the national and international banking system. However, Basel New Capital Agreement will increase the capital requirements in developing countries as a whole, making some adverse affect on capital flows in developing countries. In some degree, it will put emerging countries¡¯ banking into an adverse competition status, especially to their abroad branches and affiliations. Basel II will also have an impact on regulatory systems across countries and on the BCP. Monitoring of the effectiveness of banks¡¯ risk management practices will take a more prominent place under Basel II, as well as the effectiveness of the supervisory review process, disclosure and market discipline. ¡¡

¡¡¡¡2. Core Principles for effective banking supervision¡¡

¡¡¡¡International recognition of the need for strong, effectively-supervised banking systems is the reason that the Basle Supervisors Committee issued its 1997 paper, "Core Principles for Effective Banking Supervision." (BCP)¡¡

¡¡¡¡The Basel Core Principles comprise 25 basic principles that need to be in place for a supervisory system to be effective. The principles relate to: objectives, autonomy, powers and resources; licensing and structure; prudential regulations and requirements; methods of ongoing supervision; information requirements; remedial methods and exit and cross-border banking. In addition to the principles themselves, the document contains explanations of the various methods supervisors can use to implement them. ¡¡

¡¡¡¡One of the key objectives of the BCP is to contribute to international financial stability. The Basel Committee believes that achieving consistency with the Core Principles by every country will be a significant step in the process of improving financial stability domestically and internationally. In many countries, substantive changes in the legislative framework and in the powers of supervisors will be necessary because many supervisory authorities do not at present have the statutory authority to implement all of the Principles. In such cases, the Basel Committee believes it is essential that national legislators give urgent consideration to the changes necessary to ensure that the Principles can be applied in all material respects. ¡¡

¡¡¡¡VI. Conclusion¡¡

¡¡¡¡Dangers and Prospects¡¡

¡¡¡¡Weakness in the banking system of a country, whether developing or developed, can threaten financial stability both within that country and internationally. The need to improve the strength of financial systems has attracted growing international concern. It is clear that instability in systemically significant countries can spill over to other countries, either on a regional level or globally. ¡¡

¡¡¡¡The global trading system faces danger. The working group on WTO accession reached a compromise with China establishing somewhat lower than normal permissible criteria for safeguards over the next 15 years. WTO member governments can impose "safeguards" against China¡ªtemporary import restraints in response to import surges. Furthermore, Taiwan has long since met the conditions for WTO membership, but China has not formally signaled its acquiescence. A belligerent attitude could stir up more anti-China sentiment in the U.S. Congress. ¡¡

¡¡¡¡How the United States and its major allies handle the pressures associated with China's ongoing lurch toward globalization will influence not only the effectiveness of the WTO and the health of the Chinese economy, but also, more broadly, the future of U.S.-China relations, the evolution of China's political system, and the fate of Asia.¡¡

¡¡¡¡There are also many factors may influence the safety of global banking and finance, such as North Korea and Iran¡¯s nuclear testing, terrorism, the possibility of regional war. ¡¡

¡¡¡¡In response to the reported nuclear test by North Korea, it is vitally important that the United States lead an intense and sustained effort with Japan, South Korea and China to clarify each other's intentions and policies in ways that avoid any nuclear competition. A nuclear chain reaction could take place in the form of an arms race, or, internationally, Iran could take a cue to be more provocative in the nuclear arena. Moreover, nuclear weapon states must pay more attention to steps they could take to prevent a chain reaction of other countries conducting nuclear weapon tests.¡¡

¡¡¡¡As to the Geopolitical risk in the global economy, China-Taiwan has been a political issue and has gone to the side pertaining the US-China relations. Right now, China is rising in every aspect, with economy power to political confidence. In my point of view, China is trying to become a soft super power essentially on economic interdependence. It is becoming the crucial link in supply chains around the world, to make it impossible for anyone to be doing something that is not in China¡¯s interest. Even China has passed a law which in effect says ¡°Even if you think about seceding, we reserve the right to take all necessary means¡± to Taiwan, I always consider this will be solved rationally in due course without the possibility of regional war. In other words, China-Taiwan issue will not be a prospect risk for global banking and finance. ¡¡

¡¡¡¡In U.S., the opinions of Republican and Democratic in their China policies appear to different colors but also no lack of consensus. Both parties have acknowledged that U.S. and China have joint interest, as currently both have very good cooperation in anti-terrorism and promoting stability in Korea Peninsula. Both parties have expressed concern on China¡¯s ¡°non-proliferation¡±. U.S. has noticed the significance of developing a constructive relationship with China, from ¡°strategic competitors¡± to ¡°welcome to rise¡±. But as to the Taiwan issue, there are notable differences between two parties¡¯ opinions. Democratic will adhere to one-China policy but will continue to provide Taiwan with defensive weapons whereas Republican will comply with ¡°Taiwan Relations Act¡±. With regard to China trade policy, Democratic is relatively tough for its preparation to investigate China¡¯s controlling trade policy and violation of workers¡¯ rights. But Republican pointed out China¡¯s entry into WTO benefits bilateral trade relationship. No matter which party comes to have power, its decision of relationship with China eventually falls on the consideration of U.S. consolidated interest. Moreover, U.S. policy to China will correspondently affect the global trade and finance tendency. ¡¡

¡¡¡¡To conclude, there is a great deal of uncertainty around the nature of risks in the markets as well as many external risks, the adequacy of risk and what might trigger the next stress scenario. There is a lot that banks and supervisors can do in practice to better prepare for the inevitable next downturn. Banks and supervisors can focus their efforts on strengthening risk management in areas that presents the greatest vulnerabilities to the deteriorating market liquidity scenario, as well as on those risks that are not well addressed using more traditional risk metrics. Moreover, there is significant value in the industry and supervisors sharing insights on issues and concerns around this type of a scenario. Finally, Basel II provides a structured framework for discussing some of the new risks we are seeing and creating incentives to better measure and manage those risks.¡¡

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