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Basel II and Bankers’ Propensity to Take or Avoid Excessive Risk

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  • George Benston

Abstract

Both Basel I and Basel II are concerned (indeed, obsessed) with risk taking by bankers. But risk is an essential part of banking. The essential issues are “when are such risks excessive and does Basel II effectively constrain bankers from taking excessive risks?” I answer these questions by outlining alternative definitions of excessive risk and analyzing the extent to which Basel II deals effectively with this risk. I find the Basel II measures both costly and inadequate, and likely increase excessive risk taking. I conclude with a preferable alternative procedure – including subordinated debt fully in required capital and prompt corrective action based on prestructured capital/asset ratios. Copyright International Atlantic Economic Society 2007

Suggested Citation

  • George Benston, 2007. "Basel II and Bankers’ Propensity to Take or Avoid Excessive Risk," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 35(4), pages 373-382, December.
    • Handle: RePEc:kap:atlecj:v:35:y:2007:i:4:p:373-382
    DOI: 10.1007/s11293-007-9093-7
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    References listed on IDEAS

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    1. Carolyn Currie, 2006. "A Test Of The Strategic Effect Of Basel Ii Operational Risk Requirements On Banks," The IUP Journal of Monetary Economics, IUP Publications, vol. 0(4), pages 6-28, November.
    2. George J. Benston, 1995. "Safety Nets and Moral Hazard in Banking," Palgrave Macmillan Books, in: Kuniho Sawamoto & Zenta Nakajima & Hiroo Taguchi (ed.), Financial Stability in a Changing Environment, chapter 8, pages 329-385, Palgrave Macmillan.
    3. George J. Benston & George G. Kaufman, 1988. "Risk and solvency regulation of depository institutions: past policies and current options," Staff Memoranda 88-1, Federal Reserve Bank of Chicago.
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    Cited by:

    1. Ana Kundid Novokmet, 2015. "Cyclicality of bank capital buffers in South-Eastern Europe: endogenous and exogenous aspects," Financial Theory and Practice, Institute of Public Finance, vol. 39(2), pages 139-169.
    2. repec:ipf:finteo:v:39:y:2015:i:3:p:139-169 is not listed on IDEAS

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    More about this item

    Keywords

    Basel II; Risk; Excessive risk; Bank failure; Subordinated debt; Prompt corrective action; G28;
    All these keywords.

    JEL classification:

    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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