Basel II: the new Basel Accord is an important step in the regulation and supervision of banking markets with significant implications for the development of financial markets and the competitive positions of banks (1).(REGULATORY CHANGE)

Publication: Journal of Banking and Financial Services

Publication Date: 01-JUN-05

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COPYRIGHT 2005 Australian Institute of Banking and Finance

Although Basel II was designed principally for the largest international banks operating in international, highly developed, financial markets, supervisors and bankers from the Australia-Pacific Economic Cooperation (APEC) economies cannot afford to ignore its key messages and implications.

What are the key messages?

First, Basel II has been driven by the ongoing explosive growth in the financial market activities of banks and exciting developments in risk management practices. While Basel II provides a template for supervision in such a world, it is not an end in itself. Indeed, a major objective and potential benefit is the increased focus on, and incentives to adopt, advanced risk management practices.

Basel II should be seen as a means to improve banking sector risk management practices and continue development of robust and safe financial systems. Of course, implementing Basel II is only one of many ways in which national supervisors can achieve those objectives, and for many economies, Basel II may, at this stage, involve too large a step to be taken in the near future. Nevertheless, the emphasis of Basel II on the principles of improved risk management, effective supervisory practices and the role of market discipline should be acceptable to all banking supervisors. Noticeably, the USA has decided not to implement Basel II for most of its banks, largely on the grounds that it believes it is achieving those objectives with its current supervisory and regulatory arrangements.

Important also, and close to the hearts of bankers, is the attempt to make regulation more compatible with efficient banking practices and decision making, in particular, aligning measures of regulatory and economic capital and facilitating more efficient risk-based pricing of credit. The overall economic and social benefits of such developments, through more efficient allocation of credit, should not be downplayed.

Dramatic developments in risk management practices have occurred in recent years driven by theoretical advances in finance and improvements in information technology and systems. Another motivating factor has been the need for improved risk management to cope with challenges resulting from modern financial instruments and markets. This will...

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