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The third pillar of BASEL-II Accord is known as _______.
1. Market Discipline
2. Stare Decisis
3. Exchange Control
4. Blue Sky Law
5. Bundle of Rights 

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Correct Answer - Option 1 : Market Discipline

The correct answer is Market Discipline.

Basel II Is Three Pillars

  • Basel II has three pillars: minimum capital, supervisory review process, and market discipline Disclosure.
  • Minimum capital is the technical, quantitative heart of the accord. Banks must hold capital against 8% of their assets, after adjusting their assets for risk.
  • Supervisor review is the process whereby national regulators ensure their home country banks are following the rules. If minimum capital is the rulebook, the second pillar is the referee system.
  • Market discipline is based on enhanced disclosure of risk. This may be an important pillar due to the complexity of Basel. Under Basel II, banks may use their own internal models (and gain lower capital requirements) but the price of this is transparency.

Basel II Charges for Three Risks

  • The accord recognizes three big risk buckets: credit risk, market risk, and operational risk.
  • In other words, a bank must hold capital against all three types of risks.
  • A charge for market risk was introduced in 1998.
  • The charge for operational risk is new and controversial because it is hard to define, not to mention quantify, operational risk.
  • The basic approach uses a bank's gross income as a proxy for operational risk. It is not hard to challenge this idea.

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