So Basel one was too simplistic, and hence were commenced on Basel two. Basel two was implemented in 2008, and basically, Basel two allowed for more complex risk weighting for assets and added some additional risk weighting measures to cover market and operational risk. Basel two was presented in three pillars. Pillar one said, we allow for different methods for calculating risk weighted assets. We allow an internal method, as well as a standardized method. We, of course, require higher risk weighting for riskier loans, and lower risk weighting for less risky loans. So a loan to a highly rated entity would have a lower risk weighting than a loan to a badly rated entity.

On top of that, Basel two said we have to add a risk weighted asset component for market risk. So the higher the market risk, the more stocks the bank owns, the higher the risk weighted assets need to be. And it also said we need a risk weighted asset component for operational risks. So a bank that's operationally risky needs to have higher risk weighted assets. Both of these make total sense, because both market risk and operational risk can bring a bank down. It should be noted that the calculation of risk weighted asset has changed very little with the implementation of Basel three, which of course came after Basel two. Pillar two in Basel two said, we require internal reviews to be performed by business lines inside of the bank, and those business lines need to review their capital adequacy. And in doing so, they need to take into account all sorts of risks. And then finally, Pillar three, and Pillars three said, we require more market disclosure so that we improve stock market and credit rating assessment. This is super smart, so what does it do? Well, it says, you the bank need to disclose more information out into the market, and this effectively delegates regulation to the stock market and to the credit markets and the rating agencies. This is brilliant, and it's an example of the market discipline tool.