Modeling the Interaction of Banking Supervision Categories Basel 1 and Basel 2 in Cluster Dimensions

Abstract

The problems of payment ability and stability of the international banking system remain essential. The new regulatory approach in central Europe's banking system is based on a revised system of rules and incentives, enabling a more effective pursuit of prudential supervision's objectives. This framework consists of a modular system of rules for calculating capital requirements that incorporates the best practices developed by banks in risk management methodologies. It strengthens the link between capital requirements and organizational aspects, exploiting synergies in the management of banks and supervisory assessments and actions. It is necessary to implement fundamental principles of regulation and methodology of banking risks and transformation of business models – higher capital costs would create incentives for banks to move toward different business models. The tasks of banking supervision are to promote reliable risk management practices. Basel II establishes tougher capital standards through more restrictive capital definitions and higher risk-weighted assets (RWA). These reforms will fundamentally impact profitability and require the transformation of the business models of many Ukrainian banks.