Bracing for Basel

When international banking supervisors met in Basel, Switzerland in 1999 to propose a new framework for capital adequacy, they set in motion the biggest shake-up of the decade as to how banks measure risk and allocate capital. The new proposals, called Basel II, aim to make banks adopt a more comprehensive, sophisticated and risk-sensitive approach for calculating regulatory capital.

To meet the Basel II requirements, banks must radically overhaul the way they measure credit risk and, for the first time, they must bring operations into the same rigorous risk management framework. But compliance has its price: Major banks will spend up to $150 million and the global industry as a whole will pay upwards of $180 billion.

The carrot offered to banks by Basel II is that if they