Basel II to Basel III: A Great Leap Forward?

Abstract

The global financial crisis has revealed the inadequacy of Basel II and exposed its loopholes. As a result, the Basel Committee on Banking Supervision (BCBS) has come up with proposals to overhaul and reform Basel II so that it can deal with a future crisis of the magnitude of the global financial crisis. The reforms, as Nout Wellink argues, are designed to respond to key pre-crisis shortcomings. On 19 December 2009 the BCBS announced the publication of two consultative documents for review and comments: Strengthening the Resilience of the Banking Sector; and International Framework for Liquidity Risk Measurement, Standards and Monitoring. The two documents contain the details of a 'reform package' designed to 'improve the banking sector's ability to absorb shocks arising from financial and economic stress, whatever the source, thus reducing the risk of spillover from the financial sector to the real economy'. The reform proposals constitute what has become to be known commonly as Basel III, a term that is not used officially by the BCBS. The objective of this chapter is to evaluate the BCBS reform proposals in relation to the developments unfolding during the global financial crisis. It was claimed, at one time, that Basel II was a great leap forward compared to Basel I, but that turned out not to be the case. Here, we want to find out if the planned move from Basel II to Basel III is a great leap forward.