Pillar 2 was introduced as part of the prudential framework for banks by the Basel 2 Accord (2004) with the aim to incentivize institutions to properly measure and manage their risks, as a complement to the minimum capital requirements (Pillar 1). The objective of the paper is to discuss the evolution of Pillar 2, from the Basel high-level principles to its implementation in major jurisdictions, and argue whether and to what extent it is consistent with the original paradigm.
The paper argues that Pillar 2 has evolved over time since the Basel principles were designed in a pre-crisis environment; in recent years, it has nevertheless contributed to strengthen the resilience of the banking system. In light of the gradual improvement of the economic environment and the completion of the post-crisis regulatory reform, it is essential that a number of policy issues be closely monitored and possibly fixed to avoid Pillar 2 losing its key properties.
