Basel II: Vintage 2003

Abstract

This paper is a commentary on the third in the series of consultative papers (CP3) on a New Basel Capital Accord for banks, earlier papers being issued in 1999 and 2001. While CP3 retains the overall structure of its predecessor, it contains many revisions and a more complete set of rules. Greater coherence has not, however, been accompanied by a reduction in complexity. This is partly an inevitable consequence of attempting to set global standards for banks at different levels of sophistication. But it also reflects financial innovation and the growing complexity of banking practice, which are a continuing source of problems for regulation. Many of the revisions in CP3 in comparison with 2001 are a response to representations from governments and the financial sector in areas such as greater flexibility regarding adoption of different elements of the internal ratingsbased approach, adjustment of the risk weights for lending to small and medium‐sized enterprises (SMEs) to avoid punitively high interest charges, and a less prescriptive approach to measuring operational risk under the most advanced option for handling the subject. The Basel Committee on Banking Supervision intends to address some continuing reservations concerning the shape of the New Accord before mid‐2004. Even these further changes, however, are unlikely to bring on board major countries which have declared that they will not apply the New Accord or limit its application to a minority of their banks.