Basel II to encourage smaller banks to invest in risky assets

The rule change could prompt a "massive shift" in asset allocation over the next two years, as smaller institutions buy up the lower quality assets being sold off by the large banks, Plaut told RiskNews.

Unlike its predecessor, Basel I, Basel II allows larger institutions to use internal ratings-based (IRB) approaches based on their own figures, default probabilities and historical loss experience to assess how much capital to lay against perceived risk.

But smaller banks without such resources

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