Basel II
Basel II refers to a comprehensive and internationally agreed set of minimum standards for financial institutions designed to ensure that they have enough cash reserves to cover the risks involved in their operations.
Agreed in June 2004, the Basel II framework aims to improve on the original 1980s Basel capital adequacy standards by promoting a more flexible, forward-looking view, with the aim of guiding banks to consider present and future risks with the objective of developing and implementing plans or strategies to deal with them.
Set by the Basel Committee on Banking Supervision, a global body which convenes in the Swiss city, the Basel II accord requires institutions with riskier operations to hold additional capital to cover potential losses. Basel II also promotes transparency through the requirement that banks publicize both their risky assets and the risk management processes they have adopted to handle them.
Recently, the effectiveness of the Basel accords has been put under the spotlight by the credit crunch and the associated banking crisis, with moves by bodies such as the European Commission to force banks to hold more cash to cover risky assets. Given the level of taxpayer-funded support offered to banks in the US and Europe, there has been considerable political pressure to give regulators the power to impose heavy penalties on banks with remuneration structures that encouraging excessive risk taking.
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