Basel II

Basel I established the banking industry's minimum capital requirements rules; Basel II expanded them.

Based on the pillars of regulatory supervision, market discipline and minimal capital requirements, Basel II provides rules for calculating minimum regulatory capital ratios. It further refines how we define the risk-weighted assets established in Basel I, which are an important variable in determining regulatory capital ratios.

Unlike Basel I, however, Basel II accounts for asset credit rating when determining risk weights. If the credit rating goes up, the risk weight goes down. This was instituted to incentivize banks to hold fewer risky assets, thereby serving to stabilize the global banking system.