Basel II: Panacea or a missed opportunity?

Abstract

At the end of June 2004, the Basel Committee on Banking Supervision (henceforth, the ‘Basel Committee’) finally issued the ‘New Capital Accord’ (henceforth called ‘Basel II’), following endorsement by G10 bank supervisors. This Accord will replace the original accord (now termed ‘Basel I’) agreed in July 1988 and implemented by most major banks around the world since 1993. Publication follows years of exhaustive work by the Basel Committee to improve upon the original in the light of market developments, advances in risk management and revealed deficiencies in the operation of the current scheme. This paper traces the evolution of Basel II from its inception in June 1999 to agreement on its final form. The impact of the consultation entered into with interested parties (there were three formal rounds of consultation) on the final shape of the Accord is explored, as is the role played by the Quantitative Impact Studies (particularly, ‘QIS3’) in the moulding of Basel II. Finally, the agreed package of proposals is assessed from a ‘cost-benefit’ standpoint, and outstanding concerns are identified. In particular, the question of whether or not the Committee has done enough to try and ensure that its ultimate objectives are realised is addressed, as is the possibility that it overlooked a golden opportunity to more fully embrace market discipline within the supervisory process.