The future for Basel II

With Basel II delayed yet again, will revisions to the capital Accord happen at all? David Rowe says Basel I is the best argument for persevering, but any revisions must address regulatory arbitrage problems and take greater account of the full range of credit risk mitigation techniques.

The Basel Committee on Banking Supervision’s attempts at making the regulatory capital rules more credit risk sensitive have been widely supported. Much of that support stems from the fact that the current rules fall woefully short in this regard. They were imposed in the late 1980s, primarily to reverse the steady erosion of bank capital ratios. On that basis, the initiative has been successful. But, as always, there have been unintended consequences.

The crude classification of obligors