Basel II

Objectives of BASEL II

1. Ensuring that capital allocation is more risk sensitive;
2. Enhance disclosure requirements which will allow market participants to assess the capital adequacy of an institution;
3. Ensuring that credit risk, operational risk and market risk are quantified based on data and formal techniques;
4. Attempting to align economic and regulatory capital more closely to reduce the scope for regulatory arbitrage.

While the final accord has at large addressed the regulatory arbitrage issue, there are still areas where regulatory capital requirements will diverge from the economic capital.