Basel II

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Basel II refers to the updated version of the original Basel Accord that determined global risk-based capital requirements for banks and other financial-service companies. Basel II, which loosened capital requirements under some conditions, was first implemented in 2005 and is now held partly responsible for the global credit crisis.

The process of developing Basel II began in 1991 in discussions between the Bank for International Settlements' Basel Committee and the International Organization of Securities Commissions (IOSCO) to bring risk-capital requirement for banks and securities firms into balance. The agreement was finalized and released in June, 2004 followed by a 'revised' version in November, 2005[1] and since then has undergone several additional revisions.[2] In 2007 Basel II was adopted by the Federal Deposit Insurance Corporation (FDIC), Federal Reserve, Office of Thrift Supervision and the Comptroller of the Currency.

More recently, Basel II has received criticism and calls for its repeal over its share of blame for excessive risk-taking by banks in the run-up to the 2007-2008 credit crisis and subsequent U.S. investment-bank meltdown. Basel II's looser risk-capital requirements encouraged banks to off-load capital by buying riskier securities like credit default swaps from insurers like AIG, one commentator argued, setting up the insurer for the downward spiral that followed the markdown of those securities.[3] Another argued that although Basel II had been implemented too recently to be implicated in the crash, they have the potential to makie it worse and must be eliminated.[4]

References

  1. International Convergence of Capital Measurement and Capital Standards - A Revised Framework. Bank for International Settlements.
  2. Basel II: International Convergence of Capital Measurement and Capital Standards: a Revised Framework. Bank for International Settlements.
  3. Basel almost destroyed AIG. International Financial Law Review.
  4. How to Save the Financial System. Wall Street Journal.