Resources for Basel II Capital Accord (Basel II)

Bank capital adequacy

www.ft.com

Forget Basel I, the original regime for bank capital adequacy, or Basel II, its souped-up successor being adopted in Europe and the US this year. Right now many investors want Basel Zero. Banks, the argument goes, have run circles around the gobbledegook rules dreamed up in Switzerland. Only the crude but honest yardsticks of old can be trusted.

Capital adequacy measures compare banks’ equity with their assets, but there are many flavours. Traditional ratios, popular in the US, use book values. These measures have a clear flaw: not all assets have the same risk. Basel I, adopted by the G10 economies in 1988, tried to resolve this by “risk-weighting” assets (so, for example, safe government bonds have a risk weighting of zero, and thus require no capital). Basel II attempts to refine risk weightings further, putting the onus on banks to analyse their positions and to use external inputs such as credit ratings.

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