Basel II - The Opportunity
Some might think the Basel Capital Accord (Basel 2) is a costly new set of regulations set forth by nervous bank regulators under pressure from special interest groups and governments. Basel 2 sets forth regulations requiring banks to examine and address internal and external risks — specifically operational, credit and market risks. It further requires a financial institution to have a minimum amount of capital to cover these risks should it be compelled to meet its financial commitments.
Basel II was designed to prevent banks from going broke after taking bad risks or if facing a hostile operating market. Among the prompts for updates to the original 1988 Accord was Nick Leeson's role in the collapse of Barings Bank in 1995. Mr. Leeson secretly accumulated hundreds of millions of pounds in losses from risky futures and options trades; these losses ultimately toppled the bank.
There's no doubt that implementing the tools and processes necessary to comply with Basel 2 will cost banks money.
But I'm wondering: where is the opportunity here?
No doubt, sophisticated, comprehensive and accurate risk systems will help to achieve a more efficient capital utilization, and far less risk. But what other benefits do you expect?
