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This principle specifies the functional role responsibilities of the regulatory banking authorities of each country; Pillar-2-Basel Accord II supervisory review process is expected to look into each bank's operational risk management framework. Where, as a result of such review, they conclude that risk policies of the bank post a threat to the safely and soundness of the bank, they may initiate corrective action.

9. Supervisors should conduct (directly or indirectly) regular independent evaluations of these principles and ensure that effective reporting mechanisms are in place.

This principle demands supervisory action with regard to independent evaluation of a bank's policies, procedure and practices relating to operational risk management. Pillar-2 requirements also apply under this principle. Basel Committee has stated that such independent evaluation of operational risks by the supervisors (RBI, in case of Indian Banks) should broadly include assessment of the following:

* Operational risk management process and overall control environment.

* How the bank undertakes monitoring and reporting of entire operational risk profile, taking into account data on operational losses and potential risk indicators.

* Procedures within the bank in respect of prompt remedial action on risk event and vulnerabilities on operational risk.

* Bank's control system i.e. their review and audit mechanism to ensure intestate of arrangements.

* The effectiveness of the bank's disaster recovery and business continue plans.

* Operational risk management process.

* The effectiveness of the bank's operational risk mitigation efforts, especially through insurance

* Approach of the bank's computing capital adequacy for operational risk in light of its risk profile.

* In case of banks which are part of a financial group, an assessment of procedure, especially on managing entire group's operational risk matters be made-where necessary, the services of external auditors may be sought by the supervisors.

With regard to the supervisors remaining apprised of the development in banks, appropriate reporting mechanism should be put in place by the bank to enable the supervisor to receive the appropriate information. One such method may be that each bank forwards its internal management reports to supervisors on a regular basis.

10. Sufficient public disclosure should be made to allow market participants to assess an organization's operational risk exposure and the quality of its operational risk management[9].

Recognizing the fact that the area of operational risk disclosure is not well established in banks in various countries, Basel Committee feels that “timely and focused” disclosure, keeping in view the size, risk profile and complexity of a bank's operations would lead to enhance market discipline. This disclosure framework should allow investors to determine as to how the concerned bank identifies, measures, monitors and controls and mitigates operational risks.

Pillar 3 of Basel Accord II requires banks to devote full attention on market discipline.