Basel II: panacea or a missed opportunity?

At end-June 2004, the Basel Committee on Banking Supervision finally issued the "New Capital Accord" ("Basel II"), following endorsement by G10 bank supervisors. The Accord replaces the original accord agreed in July 1988 and implemented by most major international banks since 1993. Publication followed years of exhausting work by the 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. This article traces the evolution of Basel II, focussing on the post-2000 period. The Impact of the three rounds of consultation on the final shape of the Accord is explored, as is the role played by the Quantitative Impact Studies (particularly, "QIS3"). Finally, Basel II is assessed from a "cost-benefit" standpoint, and outstanding concerns are identified.