Rufus Folorunso Akinyooye - St Clements University

The real reason however may have been given by Lutz (2000) who said the Basel 2 Accord is
more of a co-operation between the regulators and the practitioners in the field rather than the
regulators-only approach of the Basel 1 Accord. In her paper she examined the reasons for the
transition from the first Accord to the second, which she said, was triggered by globalization.
This globalization, she said was characterized by not only territorial expansion of economic
activity but also by structural changes within international markets, combined with the
emergence of qualitatively new forms of financing. She detailed three broad categories of
development that characterized these structural shifts as:
(1) An increasing share of financial intermediation taking place through capital markets
as opposed to bank lending. Credit-worthy borrowers stated bypassing the banks
to transform their liabilities into tradable securities known as Securitization. With
declining loan business being continuously made unattractive by the Basel 1
Accord provision especially as it affects exposures to third world countries after the
Mexico debt crisis, commercial banks started expanding into more profitable lines
of business like investment banking where profits are made through brokerage
commissions instead of interest on credits.
(2) Institutional investors like insurance companies, pension funds, or mutual funds
became major players on the global securities markets.
(3) The emergence of financial derivatives.
With this scenario, the concept of regulatory capital required to cushion the effect of the
newly identified risks changed, and since the banks were the inventors, the regulatory
authorities had no choice but to partner with them in the task of calculating appropriate
regulatory capital. The result was to eventually become the Basel 2 Accord. This explains
Lutz (2000) argument that the Basel 2 Accord is a co-operation between the regulators and
the practitioners in the field.
THE BASEL 2 ACCORD- INTERNATIONAL CONVERGENCE ON CAPITAL
MEASUREMENT AND CAPITAL STANDARDS- A REVISED FRAMEWORK
Item 1 - Describes the Basel 2 Accord as the outcome of the Basel Committee on Banking
Supervision work over recent years to secure international convergence on revisions to
supervisory regulations governing the Capital adequacy of internationally active banks. It
confirms the Accord and that
the Central Bank Governors and Heads of Banking Supervision of the Group of Ten Countries
have endorsed the Standard it contains.