Basel II international convention: the content and targets of supervisory review process

In the article the author continues the study of Basel II Convention, considers the content of supervisory review process and banking risks as its targets. There have been structurally investigated the provisions of the Second component of Basel II (Part III of the Convention); this component integrates the principle rules of the process of supervision over the credit institutions by the national authorities (central banks) in the member countries of Basel II - “International Convergence of Capital Measurement and Capital Standards: new approaches”, as well as the issues resolved in the implementation of the supervisory review process. The aim of the research is to reveal the content of the supervisory review process and the banking risks as the target objects of supervision over complying by the banks with the provisions on capital measurement and capital standards on the part of the competent authorities. Methods: in aggregate there have been used the methods of scientific knowledge, including the basic ones: the methods of systematicity, analysis and comparative law method. Results: there has been proved that Basel II supervisory review process is intended to ensure the adequacy of banks’ capital available to cover all the risks and encourage the banks to develop and modernize the methods of monitoring and managing the risks, to which the banks are exposed. There has been established the responsibility of heads of banks for their developing the procedures of the bank’s capital assessment and for determining the level of capital corresponding to the nature of the risk and the bank control environment. The supervisors assess the ability of banks to determine the capital requirements regarding the risks, intervene in this process, conduct a dialogue with the banks for ensuring the rapid adoption of the measures to reduce the risks and replenish capital by the banks. The raise of banking risks is neutralized by an increase in the bank capital, the strengthening of the risk management system, the establishment of internal limits, the increase of allocations to reserves, and the improvement of internal control. Conclusions: Basel II contains four basic principles of the supervisory review process, which thoroughly complement the Core Principles for Effective Banking Supervision (Basel Committee on Banking Supervision, September 1997), and the Core Principles Methodology (Basel Committee on Banking Supervision, October 1999). The objects of supervision are primarily the interest rate risk in the banking portfolio, the credit risk, and the operational risk.