Even though the present Basel II Settlement has many advantages like: more transparent and detailed bankinformation, the

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Even though the present Basel II Settlement has many advantages like: more transparent and detailed bankinformation, the rating systems, the internal models of evaluation for risks, the three pillars whichrepresent a whole, an equitable bank competition, the actual financial crises revealed the limits of Basel IIframework. The disadvantages of Basel II Accord revealed by the international crises can be: the internalrating method of risks evaluation is so complex, that is very difficult to be applied by countries in East andCentral Europe, the responsibilities for bank supervisors are very high and the capital markets are full ofinnovations, Basel II is more sensitive to risks than Basel I, but not enough, because reputation risk,systemic risk and strategic risk are not operational risk. This paper analyses these shortcomings, theeconomic effects of the nowadays financial crisis and also the necessity of a new Basel III, which has toinclude more risks. The Basel I Accord in 1988, emerged because of the banks insolvency inthe 1980s, has lead to the banking system's recovery on the account of the minimum capitaladequacy. The Accord has also concurred to the international banking system's stability due tothe harmonization of international banks' practices and because of the elimination of disloyalbank competition. The stipulations of Basel I Settlement didn't have an imperative character,they were just merely given as a guide, but they were adopted by the majority of banks.The risks on the international market are evolving and they are affecting the banks' activity, in1996 the Basel I Settlement was amended by the incorporation of market risk next to the creditrisk in estimating the adequacy capital. The Basel II Accord adopted in 2004 has a more flexible character, offering to the creditinstitutions the freedom to choose their own methods of risk evaluation, but conserves the keyelements of Basel I Settlement, respectively the minimum of 8% capital adequacy.

The Basel II Settlement has many advantages like: - the credit institutions take into consideration the operational risk next to the credit risk and market risk; - the global risk approach; - the internal rating systems; - a market discipline based on the transparency principle and a detailed reporting offering relevant, credible, opportune, comparable and comprehensible information; - an increased competence for supervision authorities; - the creation of a solid bank industry; - contributes to the harmonization of bank practices between East and West Europe; - an equitable bank competition; - the three pillars represent a whole unit; - the internal methods of risk evaluation determine, that the weighting coefficients with which every risk asset is being evaluated, are not the same for the whole banking sector, but the are being established individual, by each institution, so that the risk is evaluated much more accurately, and the situations in which capital requirements are overe stimated are being eliminated. So the banks will have more money for giving credits, and they will have to make up fewer reserves. The Basel II Convention introduces in the standard approach of credit risk an accessory forfeitfor credits given to the institution with an inferior rating. So, if the Basel I Accord the minimumrequirement was 100% from the exposure, in the Basel II for B - ratings the weightingcoefficient is 150%. The exposure classes and the weighting coefficients for credit risk increasefrom 4 to 8 categories: 0%, 10%, 20%, 35%, 50%, 75%, 100%, 150%, which allows to detectmore accurately the credit risk based on the nature of investment for each bank. The weightingcoefficients for each risk do not depend only on the class in which is being placed the exposure,but also on the credit quality, determined by the ratings given by the external evaluation ofcredit/clients institutions.

The banks, which will make the most of the New Settlement will be the ones that seriously The Basel II Agreement in the context of the global financial crisis is better than Basel IAgreement, being more sensitive to risk, but not enough. The Basel II Accord takes intoconsideration a new risk, the operational risk. Basel II defines operational risk as the risk of lossresulting from inadequate or failed internal processes, people and systems, or from externalevents, including legislation risk. The shortcoming is that reputation risk, systemic risk and strategic risk are not operational risk, so they are not taken into consideration, even though theyare striking on the capital markets.

Another critique regarding the Basel II Accord refers to the large banks and financial aggregations, which adopt advanced capital adequacy approach will have greater benefits than small banks, constrained to apply the standard approach for capital adequacy. The foreign banks in developing countries by applying Basel II Agreement will give loans to the most solvent debtors, and the other debtors with a less attractive situation can borrow money from local banks.

Passage 2: Risk management, for example relative to its finance counterpart, is a much younger function. This paper examines its evolution across different eras: Basel I, Basel II, III and its follow-ups, and in post International Financial Reporting Standard 9 (IFRS 9). The journey that started as risk compliance in the Basel I era has evolved to include a strategic role post Basel II, as the risk function needs to play a lead role in capital and business mix optimisation, informing corporate strategy. IFRS 9 is another game changer, making the impairment model predictive and 'risk-based'. These changes require a new partnership model between the risk and finance functions, first in capital management and now in IFRS 9. The paper discusses this necessary evolution of risk management, its strategic role in capital and business risk optimisation, and its essential role in IFRS 9 production and governance.

A-IRB was the first game changer whereby the required capital under A-IRB became 'risk sensitive'. Pillar II and ICAAP clearly separated the 'supply' and 'demand' sides of capital. The supply side is, of course, the available capital that is managed by the finance function to conduct the necessary capital market activities. The demand side is the 'required capital' that is proportional to the level of risk taken, and therefore is also called risk capital. Both EC- and A-IRB regulatory capital (RC) are forms of risk capital and need to be estimated and managed by the risk function. These changes made the risk function the owner of the demand side of capital management, requiring the finance and risk functions to establish an effective partnership for co-management of the supply and demand sides of the capital. This partnership was not easy to develop. In the early stages, there was no holistic and integrated management of the supply and demand sides of capital. Moreover, the two measures of risk capital, namely EC and RC, were not linked. At this stage, annual capital planning and strategic planning were not an optimisation exercise, but largely an aggregation exercise. The business units simply submitted their business plans typically driven by the revenue targets and the corporate functions aggregated these individual plans. Capital planning and management was nothing more than estimating the required capital to support these plans and monitor the actual capital consumption during the year against the plan. The capital estimations were simply the outcomes of the individual plans and there was no optimisation or harmonisation of the individual plans against an objective function, such as maximising the ROE for the FI as a whole, while meeting the income and strategic objectives as the constraints of this optimization. At this stage, financial institutions could not take advantage of being a single corporation; rather, they were managed as a collection of smaller businesses. The risk function became responsible for the management of the demand side of capital, but lacked the integration with the finance and strategy functions, as well as the necessary organisational alignment to fulfill the objective.

The regulatory response to the 2007/2008 financial crisis was strong, resulting in Basel III and its follow[1]ups. These demanding regulatory changes and the following tough macroeconomic environment put a lot of pressure on ROE, forcing the FIs to find efficiencies, especially in capital management. Banks and insurance companies, in response to these pressures, are still trying to re-engineer their capital, business mix and performance management processes to boost their ROE. Organisational re-alignments are required to support these new processes.