Basel II and Bankers’ Propensity to Take or Avoid Excessive Risk

Both Basel I and Basel II are concerned (indeed, obsessed) with risk taking by bankers. But risk is an essential part of banking. The essential issues are “when are such risks excessive and does Basel II effectively constrain bankers from taking excessive risks?” I answer these questions by outlining alternative definitions of excessive risk and analyzing the extent to which Basel II deals effectively with this risk. I find the Basel II measures both costly and inadequate, and likely increase excessive risk taking. I conclude with a preferable alternative procedure – including subordinated debt fully in required capital and prompt corrective action based on prestructured capital/asset ratios.