In January 2008, the Australian Prudential Regulation Authority (APRA) adopted the new Capital Accord (Basel II) that had been developed by the Basel Committee on Banking Supervision (BCBS). ^[2] Basel II is a much enhanced — meaning a more risk-sensitive and comprehensive — version of the capital requirement on banks, which is the principal regulatory tool of prudential supervision. The original Capital Accord (Basel I) had been adopted by the Reserve Bank of Australia (RBA) in 1988. It was meant to establish a minimum capital standard for internationally active banks. In Australia it has been applied to all authorised-depositing institutions (ADIs), except branches of foreign banks.

The development of the new Accord, which began in 1999, attracted considerable debate and criticism, and while its form and detailed provisions evolved in response to the debate, the introduced version (BCBS 2004b) has not met with universal approval. The main objectives of this paper are to explain the main features of the new Capital Accord as adopted by APRA and to assess criticism of the new capital requirement in the light of the global financial crisis (GFC) that was triggered by the US sub-prime loan crisis.