Impact and Limitations Deriving from Basel II within the Context of the Current Financial Crisis

The Banking sector risk management framework, geared towards maintaining a solid capital adequacy level, has witnessed a permanent evolution, determined by the global economic and financial reality. Basel II has brought an improvement of the risk management framework by adding minimum capital levels corresponding to market and operational risk and by the introduction of internal rating models. However the current crisis has brought forward some adverse effects as well as limitations. This paper analyses the evolution of prudential rules and regulations introduced by Basel II and their impact on the banking system together with outlining certain limitations.