Under Basel I, banks were required to hold capital equal to 8% of the balance of all assets.
In the US, only the largest banks will need to adopt Basel II, and the vast majority will be under a modified version of Basel I called Basel IA.
supervisors, Basel I needs to be replaced, at least for the largest, most complex banks, for three major reasons: It has serious shortcomings as it applies to these large entities; the art of risk management has evolved at the largest banks; and the banking system has become increasingly concentrated.
Basel I was a major step forward in capital regulation.
Because, of course, banks retain those assets for which the regulatory capital requirement is less than the market would apply, large banks engaging in capital arbitrage may, as a result, hold too little capital for the assets they retain, even though they meet the letter of the Basel I rules.
For the larger banks, in short, Basel I capital ratios neither reflect risk adequately nor measure bank strength accurately.
Risk measurement and management have improved significantly beyond the state of the art of fifteen years ago, when Basel I was developed.
As proposed, the minimum required capital ratio (8 percent) and the definition of regulatory capital (certain equity, reserves, and subordinated debt) would not change from Basel I.
In contrast to Basel I, which applies the same framework to all covered banks, Basel II, as currently proposed, offers three options for measuring credit risk and three for measuring operational risk.
banks already hold considerable capital in excess of the Basel I regulatory minimum, in part to meet existing U.