ABSTRACT
IN THE BANKING supervisory system, Basel II, a three-pillar approach was introduced. TheIAA (IAA, 2004) and the European Union Solvency II project have adopted this approach. The main difference is that the solvency system is much more advanced. Nevertheless, it consists of the following three pillars:
Pillar I: The quantitative requirements Pillar II: The qualitative requirements-the supervisory review process Pillar III: Statutory and market reporting
The first pillar includes the calculation of the capital requirements according to a standard model (e.g., factor based) or the introduction of partial or full internal models. It also includes rules on provisioning and eligible capital. The second pillar focuses on the supervisors and their review process, for example, a company’s internal control and RM, the approval of using partial or full internal models in Pillar I and its validation. The supervisor can also impose a company to increase its SCR, so-called capital add-ons, if it believes that the capital is not adequate or that the management is insufficient. The third pillar includes the reporting to both the supervisor and the market. The latter case will promote market discipline and greater transparency, including harmonization of accounting rules.
