Does Basel II fail?

Abstract

The recent endorsement of the new Basel II Accord by G10 central bankers has fuelled an on-going debate amongst bank regulators, policy makers and bankers on the merits and demerits of the new regulatory framework for stakeholders and financial markets. This thesis explores several questions concerning the new Accord, including: (1) Does it meet the objectives set out by the Basel Committee on Banking Supervision? (2) What will the impact be upon the lending activities conducted by banks? (3) Will bank capital levels rise or fall as a result of its adoption? (4) Will bank fragility and the likelihood of bank failure increase or decrease? (5) Ultimately, does Basel II fail? While a major overhaul of Basel I was required, and the objectives of the BCBS have merit, we conclude that the new framework has significant deficiencies which will distort lending practices and has the potential to aggravate, rather than diminish, the risks of certain banks and national banking systems which are unable to implement the most advanced risk measurement methods. From a national policy perspective, fostering development and implementation of adequate macro-prudential standards must be the initial focus and underlying foundation upon which prudential bank regulation is developed, rather than relying upon a highly complex and prescriptive capital-based regulatory environment of institutional risks.