Abstract:
The three pillars of Basel II introduce new capital ratios, new supervisory procedures, and
demand better disclosure to ensure effective market discipline in both the equity and debt
markets. Included in these requirements, for the first time, is the necessity for financial
institutions to provide for operational risk, as distinct from credit and market risk. This is
considered to be most problematic of Basel II requirements. posing difficulties of definition,
implementation, and strategic planning. It will affect product development, investment and asset
mix, as well as requiring the rapid development of new risk rating models and techniques
together with vastly expanded internal and external audit compliance routines. The issues of cost,
necessity and difficulties of measuring operational risk are examined in this paper. Apart from
micro effects on bank pricing, macro questions of restriction of credit and distortions in systems
efficiency need to be addressed. Such issues are considered in the context of reasons for bank
failure and the effect on systemic goals of stabiliry and safety.
