what is basel ii 
basel ii is a set of international banking regulations first released in 2004 by the basel committee on banking supervision it expanded the rules for minimum capital requirements established under basel i the first international regulatory accord provided a framework for regulatory supervision and set new disclosure requirements for assessing the capital adequacy of banks 1understanding basel iibasel ii is the second of three basel accords it is based on three main pillars minimum capital requirements regulatory supervision and market discipline minimum capital requirements play the most important role in basel ii and obligate banks to maintain certain ratios of capital to their risk weighted assets because banking regulations varied significantly among countries before the introduction of the basel accords the unified framework of basel i and subsequently basel ii helped countries standardize their rules and alleviate market anxiety regarding risks in the banking system the basel framework currently consists of 14 standards 2the basel committee is made up of 45 members from 28 countries and other jurisdictions representing central banks and supervisory authorities 3 it has no legal authority to enforce its rules but relies on the regulators in its member countries to do so those regulators are expected to follow the basel rules in full but also have the discretion to impose even stricter ones 4 for example in the united states the regulators are the board of governors of the federal reserve system the federal reserve bank of new york the office of the comptroller of the currency and the federal deposit insurance corporation 3basel ii requirementsbuilding on basel i basel ii provided guidelines for the calculation of minimum regulatory capital ratios and confirmed the requirement that banks maintain a capital reserve equal to at least 8 of their risk weighted assets basel ii divides the eligible regulatory capital of a bank into three tiers the higher the tier the more secure and liquid its assets tier 1 capital represents the bank s core capital and is composed of common stock as well as disclosed reserves and certain other assets at least 4 of the bank s capital reserve must be in the form of tier 1 assets 5minimum capital requirements play the most important role in basel ii and obligate banks to maintain certain ratios of capital to their risk weighted assets tier 2 is considered supplementary capital and consists of items such as revaluation reserves hybrid instruments and medium and long term subordinated loans tier 3 consists of lower quality unsecured subordinated debt basel ii also refined the definition of risk weighted assets used in calculating whether a bank meets its capital reserve requirements risk weighting is intended to discourage banks from taking on excessive amounts of risk in terms of the assets they hold the main innovation of basel ii in comparison to basel i is that it takes into account the credit rating of assets in determining their risk weights the higher the credit rating the lower the risk weight regulatory supervision and market disciplineregulatory supervision is the second pillar of basel ii and provides a framework for national regulatory bodies to deal with various types of risks including systemic risk liquidity risk and legal risks the market discipline pillar introduces various disclosure requirements for banks risk exposures risk assessment processes and capital adequacy it is intended to foster greater transparency into the soundness of a bank s business practices and allow investors and others to compare banks on equal footing pros and cons of basel iion the plus side basel ii clarified and expanded the regulations introduced by the original basel i accord it also helped regulators begin to address some of the financial innovations and new financial products that had come along since basel i s debut in 1988 basel ii was not entirely successful however and has even been called a miserable failure in its central mission of making the financial world safer 6the subprime mortgage meltdown and great recession of 2008 showed that basel ii underestimated the risks involved in current banking practices and that the financial system was overleveraged and undercapitalized despite basel ii s requirements even the bank for international settlements the organization behind the basel committee on banking supervision today acknowledges the banking sector entered the financial crisis with too much leverage and inadequate liquidity buffers these weaknesses were accompanied by poor governance and risk management as well as inappropriate incentive structures the dangerous combination of these factors was demonstrated by the mispricing of credit and liquidity risks and excess credit growth 1responding to the financial crisis the basel committee issued new risk management and supervision guidelines to strengthen basel ii in 2008 and 2009 those reforms and others issued in 2010 and later represented the beginnings of the next basel accord basel iii which as of 2022 is still being phased in 