CEPS paper: Basel II – the remaining issues

30 March 2002

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This paper from the Centre of European Policy Studies (CEPS) states that a close look at the proposed new Accord draws attention to the considerable degree of uncertainty with regard to its implications (for instance on the level of overall capital requirements) and on some issues raises the spectre of some potentially adverse consequences.

In the worst case, the adoption of the Accord as currently proposed could lead to substantial restructuring in the banking industry, which could have the undesirable outcome of allowing some sophisticated banks using the IRB approach to dominate the market, leading to potentially oligopolistic behaviour.

In addition to this, the numerous procyclical elements built in to the Accord could make the entire financial system more volatile, leading to more crises. It is against this background of greater volatility, that the uncertainty regarding the implications of the new Accord for overall capital holdings -–and hence protection against systemic risk – is even more worrying.

Finally, the new Accord may lead some developing countries to be cut off from bank-lending altogether, with considerable adverse consequences for welfare. Even if this worst-case scenario seems overstated, it is to be hoped that the issues outlined briefly in this paper can be addressed during the prolonged consultation-period, so that a successful update of the 1988 Accord can be implemented in 2005.

See full CEPS paper

© CEPS - Centre for European Policy Studies