Basel II: The Revised International Capital Framework

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Basel II was introduce in 2004 as a result of the perceive weakness of the previous accord referred to as Basel I. This new accord was believed would be more effective since it aimed to address three broad categories of risks namely, credit risk, market risk and operational risks. The Basel committee believed that banks could cushion themselves against the above risks by having an appropriate capital level. However, Basel methodology of deriving the above risks was somewhat misguided. For instance, the credit risk relied on historically data. Although at times historical data can act as an indication of future occurrence, in this scenario the relied data was inadequate. It could not help project abnormal and rare occurrence, such as the financial crisis, since it was only derived from the past 5 years. Similarly, both the internal rating and standardized approach of credit rating have been cited as barely credible methods. At the height of the global crisis, the weaknesses of both the method were illuminated. Particularly, they were subject to “manipulation” in favor of the banks and as result, Basel II failed to serve its purpose of ensuring banks have adequate minimum capital (Reinmart, 2009; Schemmam, 2008; Lennox & Becker, 2011).

Categories of Risk

Basel II defined a framework of capital adequacy through three pillars. The first pillar defined the capital requirements, elaborating rules of capital ratio while putting into consideration the above mentioned categories of risk. Credit risk, was the initial concern of Basel I, it is the risk associated with borrower’s default, a factor that might push the bank in question into liquidity or insolvency crisis. Therefore it focuses on the probability of default and t...

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...atory decision in one country might affect safety-net cost of other countries (Caprio, Kun & Kane, 2008).

Works Cited

Caprio, G., Kun, D.A., & Kane, J. E. (2008). The 2007 Meltdown in Structured Securitization:

Searchin for Lesson Not Scapegoats. World Bank Policy Research Working Paper, 4-51.

Lennox, K., & Becker, N. (2011). Around table Discussion of the Strength and Weakness of

Basel II, hence Propose the way Forward. Banking Review, 4, 5-15

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Schemmann, M. (2OO8). Why Banks Keeps On Failing: Money, Banking and the Basel II

Accord. Central Asia Business, 1, 72-76.

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