Why Basel II?
In introducing the concept of risk-based capital ratios, Basel I established the important principle that regulatory capital requirements should be related to risk. At various times, of course, supervisors have also made important adjustments to the Basel I framework, such as the Market Risk Amendment mentioned earlier. Nonetheless, advances in risk management and the increasing complexity of financial activities have prompted international supervisors to review the appropriateness of regulatory capital standards under Basel I, particularly for the largest and most complex banking organizations. The supervisory organizations have agreed that Basel I, with its broad-brush system for setting the risk weights on various classes of bank assets, is increasingly inadequate for measuring risk and the appropriate level of capital for such firms. For example, under Basel I, a bank’s regulatory capital requirement takes no account of the specific risk profile of its commercial loan portfolio, de
