This past June, the bank regulators on the Basel Committee on Banking Supervision postponed the deadline for finalizing a new version of the 1988 Capital Accord, which serves as the basis of the minimum-capital requirements for banks around the world.1 Although the regulators affirmed their commitment to the broad outline of their proposal—Basel II—they conceded that many of its details were incomplete. The Basel committee now plans to issue a new draft in early 2002 and to finalize it during that year.
The regulators were wise to delay. Far from being an esoteric banking issue, the new rules will have far-reaching implications for banks and borrowers everywhere. Although the current draft of Basel II clearly improves on the 1988 Capital Accord, it does not live up to two of the Basel committee’s main goals: aligning minimum-capital requirements with risk more satisfactorily and encouraging banks to adopt better risk-management practices. Indeed, Basel II as currently written threatens to put an undue and unintended capital burden on banks and to discourage them from embracing more sophisticated credit-risk-management practices.
As the committee drafts a revised version of Basel II, it should add four key modifications to its list of planned changes....