Basel 2.5: A lot of sizzle but little nutritional value

Imad Moosa

Journal of Banking Regulation, 2012, vol. 13, issue 4, 320-335

Abstract: The objective of this article is to present a critique of Basel 2.5, the intermediate set of provisions between Basel 2 and Basel 3. It is argued that Basel 2.5 is the product of an ad hoc job, that it is unnecessarily complex and costly and that it does not circumvent the fundamental problems of Basel 1 and Basel 2. The main defect is still the calculation of regulatory capital on the basis of risk-weighted assets, which causes procyclicality and distorts the relation between the capital ratio and the leverage ratio. This procedure has contributed to the onslaught of the global financial crisis as banks scrambled to accumulate triple-A CDOs to reduce regulatory capital requirements. It is also argued that Basel 2.5 provides a boost to the regulatory fatigue endured by banks and the regulatory capture inflicted on regulators.

Date: 2012
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