Resources for Basel II Capital Accord (Basel II)

Basel II – regulating the risk weightings

www.chasecooper.com

Following the sub-prime credit crisis, ratings agencies have been criticised by regulators and central banks for over-optimistic ratings of the key mortgage-backed securities, ratings which would also have had a direct impact on Basel II capital calculations. Now the US’s Securities and Exchange Commission (SEC) has brought seven of the largest rating agencies under its control and will oblige them to disclose their procedures and methodologies for assigning ratings.

Basel II revolves around the calculation of risk-weighted assets, from which regulatory capital requirements are derived. The largest element of this is from the calculation of credit risk weightings, and these are in direct relation to the credit ratings assigned. So the argument goes – get the ratings wrong and the capital will be incorrectly calculated. As rating agencies are paid by those they rate, the market view is that they are under pressure to give their clients a favourable rating – or the client will move to another agency

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