Bank Capital Regulation Under Basel 2: A Critique

Maximilian J. B. Hall (Loughborough University, UK)

The Basle Committee is to be congratulated for, finally, moving to address the long-standing flaws inherent in the original Basle Capital Accord, for seeking to move forward with the times, and for responding in such a positive fashion to the comments received following the publication of its original reform proposals in June 1999.

The January 2001 package of proposals represented a marked improvement, in terms of the overall increase in cost-effectiveness likely to result, on the initial set of proposals, although serious concerns persisted on a number of fronts.

Similarly, the July 2002 package provided, on balance, yet further improvements. However, not all of the concerns raised earlier have been adequately dealt with and, as the Committee still has time to further refine its blueprint for reform before implementation is called for (end- 2006), it is to be hoped that some at least of these outstanding concerns will be addressed.

Whatever the shape and form of the definitive reform package to emerge, at the end of the day the "proof of the pudding will be in the eating"; so a final judgement should perhaps await the outcome of its eventual implementation.

Finally, by demonstrating its willingness to "work with the grain" of the market, the Committee has paved the way for the eventual adoption of a fully market-based approach to capital adequacy assessment, should a consensus for such an approach ever emerge.