Basel II: an engine without brakes

The primary goal sought by the Bank of International Settlements and its committee on banking supervision (BCBS) is to make banks safer entities while maintaining a “level playing field.” However, the question of whether this objective can be attained through enforcing capital requirements is still debatable due to the controversy surrounding the impact of regulatory standards, in particular, the Basel I and II accords on crises that occurred soon after the frameworks were introduced. While the impact of the latter remains controversial in the U.S. due to its effective implementation date, we observe that the newly introduced capital requirements could have played a role in the buildup to the subprime crisis. These results have direct policy implications with regard to ongoing revisions to Basel III, in particular the standardized approach for credit risk.