Introduction
Basel II is the term which refers to a round of deliberations by central bankers from round the world. In 1988, the Basel Committee (BCBS) in Basel, Switzerland, published a set of minimal capital requirements for banks. This is also known as the 1988 Basel Accord, and was enforced by law in the Group of Ten (G-10) countries in 1992, with Japanese banks permitted an extended transition period. Purpose of the original 1988 accord was twofold:
First, it aimed at creating a "level playing field" among banks by raising capital ratios, which were generally perceived as too low in many countries; and second, it also aimed at promoting financial stability by adopting a relatively simple approach to credit risk with the potential to distort incentives for bank risk-taking. The guidelines of Basle accord were originally adopted by the central banking authorities from 12 developed countries (all G-10 countries plus Luxembourg and Switzerland) in July, 1988. Their implementation started in 1989 and was completed four years later in 1993. Basel I served banking industry well since its introduction in 1988 but it lagged behind the financial market developments and innovation. It increasingly became outdated and flawed as it relied on a relatively crude method of assigning risk weights to assets, emphasizing mostly on balance sheet risks relative to multiple risks facing financial firms today. Furthermore, it offered a regulatory approach to capital determination and standard setting which did not capture fully the range of large and complex banking operations and the accompanying range of diverse set of economic risks. Addressing the perceived shortcomings and structural weaknesses of Basel I, the Basel II Accord ? a landmark regulatory framework ? offers a new ...