Basel II: Panacea or a Missed Opportunity

At the end of June 2004, the Basel Committee on Banking Suspervision (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 temed "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 devleopments, 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 mny, very much longer). This article traces the evolution of Basel II form its inception in June 1999 to agrement on its final form, focussing on the period since the publication of a revised set of proposals for a new Accord in Jauary 2001. The impact of the consultation entered into with intersted 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 form 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 ultimat objectives are realised is addressed, as is the posibility that it overlooked a gold opportunity to more fully embrace market discipline within the supervisory process.