Basel II and Bankers' Propensity to Take Or Avoid Excessive Risk (Report) by Atlantic Economic Journal

Book Review : Basel II and Bankers' Propensity to Take Or Avoid Excessive Risk (Report)

By Atlantic Economic Journal

  • Publication Date: 2007-12-01
  • Genre: Business & Personal Finance

Book Review

Both Basel I and Basel II are concerned (indeed, obsessed) with risk taking by bankers. But risk is an essential part of banking. Bankers who forebear from making loans and other investments because they might incur losses serve neither their communities nor their shareholders and employees. However, risks that increase a bank's danger of insolvency might be considered excessive in a particular society. Hence, I begin this analysis by distinguishing, in "Delineation of Excessive Risk", between risks that are beneficial and those that are "excessive" and three circumstances in which they might be considered to be excessive. In the following "Basel II--Basic Assumptions", I outline and analyze some basic assumptions of Basel II about the relationship between capital and risk. Basel II was developed to deal with the shortcomings of Basel I. However, as shown in this section, some important shortcomings are ignored and, hence, continued, by Basel II. The more complex risk measures that Basel II offers as improvements over the crude measures employed by Basel I are outlined in "Basel II and Risk Measurement". As I show in "There is a Better Way", these Basel II measures are both costly and inadequate. Furthermore, as discussed in "Basel II and Bankers' Incentives to Take Excessive Risks", if adopted they would likely result in banks taking more rather than less excessive risk. "There is a Better Way" concludes by suggesting a better way to deal with bank capital regulation--higher capital that is not more costly to banks when subordinated debt is counted fully as capital and prompt corrective action based on structured required capital/asset ratios. Delineation of "Excessive Risk"

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