Risk assessments under the Basel II provisions are inadequate and inconsistent, especially in respect to the policies over mortgage and consumer lending. These are the conclusions of a recent Standard & Poor's report.
Further complaints include Basel II's failure to account for the cyclical nature of credit markets and the effects that times of economic prosperity - or gloom - can have on credit risk.
"In some instances, Basel II's proposed capital requirements either do not adequately capture the risk being assessed, are inconsistent across risk exposures, or are excessive," says Clifford Griep, chief credit officer at S&P.
The Basel II provisions will influence bank lending to corporates whose future funding plans are clearly linked to a bank's ability to lend.
The issue of debt securitization is also a concern for the ratings agency. Basel II has an adverse effect by using capital requirements far more severe than those used for unsecuritized assets of similar risk.
Barbara Ridpath, chief criteria officer at S&P Europe, explains: "Providing disincentives to securitization would inhibit the development of the securitized debt market - a market that serves as an effective mechanism for the transfer of credit risk between market participants."