When the Basel Committee on Banking Supervision published the revised framework for capital adequacy requirements in 2004 (The International Convergence of Capital Measurement and Capital Standards – A Revised Edition, or Basel II), a set of rules designed more accurately to reflect risk in the financial system, no one could have envisaged that four years later these rules would be the subject of such widespread criticism and debate.
However, while the Basel Committee clearly plans to tighten the Basel II framework in response to these financial crises, in particular the rules dealing with off-balance sheet and trading book exposures, it would appear that the core credit risk rules in the non-trading book will remain largely unchanged. It is these credit risk rules which represent a dramatic shift from the previous Basel I rules, by giving financial institutions an opportunity to align capital with actual risk more closely and to allow...