The successful
transposition of the Basel II framework into Community law
through the Capital Requirements Directive should improve
financial institutions' risk management practices and foster
financial stability in the EU. Since the Directive helps to
protect deposits and investments, applying it widely is in
the interest of European depositors, borrowers and investors.
However, some challenges remain before the legislative process
can be successfully completed. Ensuring a level playing field
with non-EU institutions, incorporating updated trading book
calibrations, maintaining sufficient flexibility to adapt
the body of law to changes in financial services markets and
ensuring even implementation in the EU are key steps towards
a successful outcome.
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From Basel I to Basel II
The Capital Accord (Basel I), adopted by the Basel Committee on
Banking Supervision in 1988, introduced minimum capital requirements
for all internationally active banks for the first time. The subsequent
development of more sophisticated risk management techniques by
banks highlighted the crudeness of the supervisory requirements
and their inconsistency with firms' internal assessment of their
capital adequacy. The increasing use of credit risk transfer instruments,
such as securitisation and credit derivatives, also pointed to the
need for a more risk-sensitive approach to be adopted. The new Capital
Accord (Basel II) seeks to address these failings, in order to further
enhance risk management and financial stability.
