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Breakingviews: Basle II could be bettered

Source: is Europe's leading financial commentary service

Date: June 2003

By Jonathan Ford

When the world's richest countries decided 15 years ago to coordinate national banking regulation in response to the upsurge in cross-border lending, their purpose was two-fold. They wanted to prevent a blow-up occurring in a big international bank that could hurt all of them. They also wanted to create a level playing field between banks with tough regulation and those in more easy-going jurisdictions.

The resulting treaty - the Basle accord of 1988 - has been successful in creating a level playing field. Most national regulators have since adopted it. But it has been less effective at regulating the credit risk taken on by banks.

Its planned successor - known as Basle II - risks going the other way. The US has just announced that it will only require a handful of banks to adhere to it when it is introduced in four years' time.

A replacement for Basle is needed. The continued globalization of banking means the requirement for cross-border regulation has grown since 1988.

The accord's shortcomings are well known. Because it dumps credit risks into big crude "buckets", banks can end up setting more capital aside for a safe loan than for a risky one.

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