The new Basel Capital Accord: A major advance at a turbulent time
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The new Basel Capital Accord: A major advance at a turbulent time

Chris Terry[1]

Table of Contents

Abstract
Introduction
The origin of the Capital Adequacy Requirement
The Structure of Basel II
Pillar 1: Capital requirements for core risks
Pillar 2: The Supervisory Review Process
Pillar 3: Market Discipline
Securitisation
Credit-risk mitigation
Concerns debated during the development of Basel II
The amount of required capital
The Pro-cyclical Nature of the Basel II Capital Standard
Market Discipline
Impact on small-business lending
Basel II and competitive neutrality
Basel II and the global financial crisis
Conclusions
References

Abstract

In January 2008, the Australian Prudential Regulation Authority introduced the second-generation capital requirement, Basel II, that substantially extended the 1988 Capital Accord of the Basel Committee on Banking Supervision. This paper explains the main features of Basel II; reviews concerns about the likely effects of the new capital requirement; and assesses the new capital requirement in the context of the global financial crisis.



[1] School of Finance and Economics, University of Technology, Sydney, chris.terry@uts.edu.au. JEL Classification Numbers: G21, G28. This paper is based on work undertaken jointly with Peter Docherty. The author wishes to thank Peter Docherty and Warren Hogan for their many conversations on Basel II, the referees for their comments and, especially, William Coleman for his considerable constructive advice. Naturally, any errors are the author’s responsibility.

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