BASEL II CREATES AN UNEVEN PLAYING FIELD

The 1988 Basel Capital Accord provided a minimum capital requirement of 8 % of risk weighted assets for internationally active banks in order to 1) ensure an adequate level of capital and 2) competitive equality. It is the second point, competitive equality that is addressed here. Competitive equality referred to the fact that at that time, banks in the major trading countries had significantly different capital ratios. Those with lower capital ratios had lower costs of funds and a competitive advantage in the loan markets of the world. Thus, one of the purposes of the 1988 Accord was to even the playing field in terms of capital requirements. It was successful. By the turn of the century, the 8 % capital standard has been adopted in more than 100 countries with internationally active banks.2 The 8 % capital standard is a “one size fits all ” measure. It focused on credit risk, which was a good starting point; but banks face a wider variety of risks. Accordingly, in 1996, an amendment was introduced that allowed banks to deal with trading/market risks. And in 1999, the Basel Committee on Bankin