Basel II

The banking world was rocked in early 2000 when the Basel II Capital Accord came out with its first draft. This accord emanated from the Bank for International Settlements (BIS), which is an international organization whose aim is to promote international monetary and financial cooperation, discussions and policy analysis, and acts as a bank for central banks worldwide. Back in 1988, the BIS created the Basel Committee for capital adequacy for banks worldwide. This first Basel I accord stipulated that different risk weightings had to be applied to the different bank asset classes, and that these risk weightings determined the amount of capital needed by banks to cover the risk on their assets. However, Basel I only broadly covered three types of loans with an undiversified and incongruous risk weighting scale (0%, 20% and 100% for OECD – Organization for Economic Co-operation Development – governments, OECD banks, and everything else