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Basel 2.5: A lot of sizzle but little nutritional value

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  • Imad Moosa

Abstract

The objective of this article is to present a critique of Basel 2.5, the intermediate set of provisions between Basel 2 and Basel 3. It is argued that Basel 2.5 is the product of an ad hoc job, that it is unnecessarily complex and costly and that it does not circumvent the fundamental problems of Basel 1 and Basel 2. The main defect is still the calculation of regulatory capital on the basis of risk-weighted assets, which causes procyclicality and distorts the relation between the capital ratio and the leverage ratio. This procedure has contributed to the onslaught of the global financial crisis as banks scrambled to accumulate triple-A CDOs to reduce regulatory capital requirements. It is also argued that Basel 2.5 provides a boost to the regulatory fatigue endured by banks and the regulatory capture inflicted on regulators.

Suggested Citation

  • Imad Moosa, 2012. "Basel 2.5: A lot of sizzle but little nutritional value," Journal of Banking Regulation, Palgrave Macmillan, vol. 13(4), pages 320-335, November.
    • Handle: RePEc:pal:jbkreg:v:13:y:2012:i:4:p:320-335
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    References listed on IDEAS

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    1. Carolyn Currie, 2006. "A Test Of The Strategic Effect Of Basel Ii Operational Risk Requirements On Banks," The IUP Journal of Monetary Economics, IUP Publications, vol. 0(4), pages 6-28, November.
    2. Riccardo Rebonato, 2007. "Introduction to Plight of the Fortune Tellers: Why We Need to Manage Financial Risk Differently," Introductory Chapters, in: Plight of the Fortune Tellers: Why We Need to Manage Financial Risk Differently, Princeton University Press.
    3. Adrian Blundell-Wignall & Paul Atkinson, 2011. "Global SIFIs, Derivatives and Financial Stability," OECD Journal: Financial Market Trends, OECD Publishing, vol. 2011(1), pages 167-200.
    4. Andreas Jobst, 2007. "Operational Risk: The Sting is Still in the Tail But the Poison Dependson the Dose," IMF Working Papers 2007/239, International Monetary Fund.
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