Tuesday, April 26, 2016

The paper tracks the development of global capital standards from its beginnings in the 1980s with Basel I, through the crisis to the full implementation of Basel II/III. The paper notes that, contrary to general belief, Basel II was not yet implemented during the period leading up to the financial crisis. In reality, Basel II and the use of internal models for capital requirements commenced only for the first banks in Europe, Japan, Canada and Australia during 2008 – simultaneous to the onset of the crisis. In the U.S., the use of internal models did not come until much later, with the first model approvals by the Federal Reserve and the Office of the Comptroller of the Currency in February 2014.

The paper notes that when banks moved on to Basel II, with regulators approving their internal models, average RWA actually plateaued above levels seen during the crisis.

The observed trend of average risk-weights under Basel I and II/III contradicts the claims that internal models are merely used to reduce capital requirements. The paper goes to note that internal models might have actually helped to avert or reduce the crisis if they had been approved for use earlier. 

IIF Authors

Brad Carr

Senior Director, Digital Finance Regulation and Policy

Natalia Bailey

Senior Policy Associate