Basel II Compliance

What is Basel II?
The Basel II Accord proposes methodologies for banks to calculate more accurately the capital provisions they should make against credit, commercial, and operational risk. Issued in June 2004, it replaces the outdated Basel I, which was adopted in 1988 and is currently used in more than 100 countries.

On July 16, 2008, federal banking and thrift agencies issued a final guidance outlining the supervisory review process for banking institutions that are implementing the new advanced capital adequacy framework (known as Basel II). The final guidance is aimed at helping banking institutions meet certain qualification requirements which took effect on April 1, 2008.

Who is affected by Basel II?
The Basel II Accord affects all banks and financial institutions whose regulating authorities adopt the standards and methods recommended by the accord.

What are the requirements of Basel II?
Basel II standardizes the measurement and quantification of risks within a financial services organization. Banks must provide disclosures that allow the market to assess its risk position and price. In addition to the management of credit risk and commercial risk, Basel II mandates an assessment of the institution's operational risk.

Basel II defines operational risk as "the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events" (644). Institutions using the Standardized Approach to calculating operational risk capital must have an adequate operational risk management system in place (633). Information security is an "operational risk management system" that significantly reduces the level of operational risk.

The Basel Committee on Banking Supervision's "Sound Practices for the Management and Supervision of Operational Risk" notes some of the operational risk event types that the Committee has identified as having the potential to result in substantial losses. These include damage from computer hacking, employee theft, fiduciary breaches, and misuse of confidential customer information.

How do institutions comply with Basel II?
Basel II requires risk appraisal and control, in other words a risk management environment. In order to reduce operational risk, financial institutions must implement robust information security measures, including the protection of critical information traveling on the network. Information security measures must ensure the confidentiality and integrity of the institution's data, including protecting customer data from accidental or malicious disclosure.

What are the penalties for Basel II non-compliance?
Basel II requires an accurate measurement of risk rather than attainment of a specific risk level. But a higher level of risk does impose economic penalties on the financial institution. High risk institutions will be required to reserve a greater amount of capital, and will be subjected to less-favorable pricing in the capital markets. Thus, Basel II means that financial institutions will bear the economic consequences of high operational risk (e.g., the neglect of data security) and reap the economic rewards of lowering it (e.g., the deployment of data security measures).

How does CipherOptics help with Basel II compliance?
When you need to encrypt your data in motion, CipherOptics makes it easy. Whether you need to protect a single link, or your entire network, we eliminate the complexity of encrypting today's networks.

Our solutions combine standards-based, wire-speed encryption appliances with CipherEngine, the only policy definition and key distribution technology designed for multi-node networks. Together, they give you the highest level of data protection at the lowest total cost. CipherEngine gives you the power to protect data in motion wherever, however and whenever you want, without changes or disruptions to your network, your infrastructure, or your operations.

To see just how easy it can be to comply with the Basel II Accord, call 1-877-878-6655 or feel free to ask us a question

Learn More About:
Network Encryption
Ethernet Encryptors
IP Encryptors
CipherEngine Policy and Key Management

Helpful Resources
Text of the Basel II Accord
Basel Committee on Banking Supervision: "Sound Practices for the Management and Supervision of Operational Risk"