Resources for Basel II Capital Accord (Basel II)

Basel II and BIS may have weakened banking system

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Sir, Malcolm Knight, chief executive of the Bank for International Settlements, has said that the “Balkanisation of regulation” lies at the heart of the financial crisis (“BIS warns on fragmented regulation”, January 26). This is blame avoidance.

Regulators around the world, led by the BIS, have spent an unseemly mountain of money on Basel II – the new regulatory capital framework. The BIS in Basel II created an industry using financial analytics and an army of consultants.

Its main thrust is on solvency, ignoring the golden rule of banking: most banks fail because of a lack of liquidity, not a lack of capital. The UK Treasury was insisting that Northern Rock was solvent (as it was), even as it was collapsing under the weight of depositor withdrawals.

The one contribution that Basel II has made to the current financial crisis is to provide incentives for regulatory capital arbitrage in the form of securitisation. This is at the heart of the current crisis. Maybe Basel II, global regulators and the BIS have actually made the banking system weaker with their new rules.

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