Introduction
As financial institutions such as banks and insurance companies face varying financial risks through their activities, they need a regulatory system to help them improving their methods of risk management. Basel Committee on Banking Supervision (BCBS) has released the first Basel Capital Accord to manage the problem. The Basel Accord seems to work fine until there were criticisms on its deficiency. This report will examine how Basel Accord failed to address certain problems and that it requires enhancement. Thus, second Basel Accord (Basel II) was released to enhance the accord to be more risk-sensitive and flexible.
The purpose of this report is to examine the origin and original intentions of the Basel II Accord. The structure, expanded scope and target institutions of the new framework, as well as the suitability issues on how different banking systems implement the new Basel Accord will also discussed in this report. The suitability issue in different banking systems will be explained by analysing the challenges that Islamic banks and banks in developing countries face in implementing Basel II.
Basel II
Origins & Original Intention
At the end of 1974, the Basel Committee on Banking Supervision (BCBS) was established in Basel, Switzerland by the central-bank Governors of the Group of Ten countries (G-10) due to the serious disturbances in international currency and banking markets (the liquidation of the German Herstatt Bank) (Bank for International Settlements, 2007). In the mid 1980s, the capital ratios of the world’s largest banks fell to dangerously low levels. Felt compelled to take action, BCBS decided to publish capital adequacy requirement, which was the Basel Capital Accord (Basel I) (Oesterreichische Nationalbank, 2 ...