Appendix C - Basel II
Basel II is an important part of the regulatory environment for banks. Basel II, which is currently under development, is intended to replace the original 1988 Accord issued by the Basel Committee on Banking Supervision.
There are three broad elements to the Basel II Accord:
- Minimum capital requirements. These play an important role in limiting the amount of lending a bank can undertake.
- The role of bank supervisors.
- Measures aimed at strengthening market discipline through enhanced disclosure.
Of greatest relevance to this study are the changes to minimum capital requirements foreshadowed by Basel II. Under the original accord, capital requirements for credit risk are based on broad classes of asset. Under Basel II, minimum capital requirements are to be more closely aligned with underlying risk and, moreover, there is to be much greater differentiation of risk levels between asset categories.
Banks will have the option of calculating their credit risk (and, hence, minimum capital requirements) either using a standardised approach or an internal ratings based (IRB) approach. With respect to SME loans in particular, banks will also have the option of including their SME exposures as part of a retail portfolio (subject to certain conditions) or in a commercial portfolio. Depending on which option is chosen, the risk weighting attached to SME exposures will vary and, by implication, the amount of capital that a bank has to have will also vary.
The implications for SME lending are discussed briefly in Section 4 of the report.
Back to Top