By James Hamilton, J.D., LL.M.
The federal banking agencies have approved the final regulations for implementation of the Basel II Accord in the United States. It replaces the 1988 Basel I Accord, which had become outdated for large, complex banking organizations. Retaining Basel I for these institutions would have widened the gap between their regulatory capital requirements and their actual risk profiles, generating further incentives for regulatory arbitrage to take advantage of that gap. Essentially, the expanded use of securitization and derivatives in secondary markets, along with vastly improved risk management systems, rendered Basel I obsolete for large international financial institutions. The entire paper may be found here.