Basel II — Achievements and Challenges

In late June 2004, the Basel Committee on Banking Supervision approved and published a document entitled “International Convergence of Capital Measurement and Capital Standards: A revised Framework”, better known as the “Basel II framework”. The publication of this document marked the final milestone of a process that was over five years in the making. The fundamental improvements over the Basel I Accord of 1988 help explain this relatively long time span. The main objectives of the new framework, stated by the Basel Committee in its June 1999 Consultative Paper, were the following: To promote safety and soundness in the financial system. To enhance competitive equality. To adopt a more comprehensive approach to addressing risks. To continue to focus on internationally active banks, although the new framework’s principles should also be applicable to banks of varying levels of complexity and sophistication. Whereas the first two goals pick up where the Basel I Accord left off, the last two represent important advancements. The desire to develop a more comprehensive approach was a direct consequence of recognizing that the current regime lacks risk sensitivity in its minimum capital requirements and encourages market participants to exploit mechanisms of regulatory capital arbitrage.