Introduction

The new Basel capital accord (B-II) promulgated by the Basel Committee on Banking Supervision (BC) was intended as a centrepiece of the financial architecture reforms that followed the crises of the 1990s (for the broader context, see Part I of this volume). B-II established a new approach to measuring capital adequacy of internationally active banks in a context of consolidated supervision of increased cross-border banking activities. Its impact will be felt well beyond the BC's G10-member financial institutions. In addition, the BC continues to set a broad range of global standards for financial regulation and prudential supervision. While B-II is ostensibly, in part at least, about creating a more level playing field among internationally active banks, this chapter provides evidence that the impact of B-II will be far from neutral on competition among different types of banks and, crucially, on the cost and availability of capital for developing countries. Furthermore, we demonstrate how B-II's inherent pro-cyclicality has an especially large impact on developing countries. Combined with B-II's reliance on rating agencies, biases against small and medium enterprises, and high costs of implementation for developing countries (see also chapter by Ocampo and Griffith-Jones in this volume), its potentially distorted impact on competition and pro-cyclicality considerably hampers B-II's effectiveness as a global supervisory standard to provide financial stability. Arguably, B-II and the market-based approach to financial supervision which the BC promoted from the 1996 Market Risk Amendment to B-I were central factors behind the emergence of the global financial crisis.