The pillar model is a fundamental concept of banking supervision and serves the stability of the financial market. Basel II defines this model and divides it into three pillars.
The first pillar, the minimum capital requirements, determines how much own funds a bank must hold to cover the risks to which it is exposed. The capital requirements are based on the type and extent of the risk.
The second pillar is the Supervisory Review Process. This is a regular review of a bank's business activities and risk management by the supervisory authorities. The aim is to identify possible weaknesses in risk management and to encourage the bank to improve its risk situation.
The third pillar, market discipline, aims to increase the transparency and comparability of banks. To this end, banks must disclose certain information, such as their risk policies, capital adequacy and risk positions. This should enable investors and other market participants to better assess the risk situation of a bank.
The pillar model thus forms the basis for effective and prudentially regulated banking supervision, which helps to ensure the stability of the financial system.
