White Papers for Basel II Capital Accord (Basel II)

Basel II: Panacea or a Missed Opportunity

American Enterprise Institute,

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 replaces 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 exhausting 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 (which
will remain in place until end-2006 for all banks and, for many, very much longer).
This article traces the evolution of Basel II from its inception in June 1999 to
agreement on its final form, focussing on the period since the publication of a revised set
of proposals for a new Accord in January 2001.1 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.

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