Basel Agonistes

Perhaps only by comparison with the 1988 Basel capital Accord does its successor look appealing. Basel I is widely derided for institutionalising irrationality in lending and loan portfolio management. For all its success in raising and standardising bank capital criteria, the first Accord is remembered as a boon for clever bankers looking for ways to earn fees structuring economically senseless deals that took advantage of the regulations’ many loopholes and arbitrage opportunities.

The Basel Committee has gone to great lengths to avoid repeating that mistake. But by ham-fistedly prescribing and proscribing in equal measure, it has stitched together a monster that can’t clear the first hurdle: flexibility. Market advances have already outrun many of Basel II’s embedded assumptions about risk mitigation. Meanwhile, the Committee has looked out over markets for thriving risk-transfer techniques such as securitisation and decided (for reasons no-one has yet been able