The current financial crisis has been attributed to multiple causes, the most critical one being laxity in adherence to risk management principles, processes, and practices. Some of the sophisticated risk management practices and framework in banks were more on paper than in practice.
The Basel II Capital Accord lays emphasis on use testing to ensure that all the sophisticated internal models and systems are embedded into Business As Usual (BAU) processes. It is in this context that Pillar 2 has assumed increased significance and relevance. This paper highlights the importance of Pillar 2 in the current financial turbulence context and summarizes the possible modifications that the regulators are considering adopting. It also suggests a suitable implementation methodology for banks to embrace Pillar 2 in their journey towards risk sophistication.