The Effectiveness of Basel II

The New Capital Accord, Basel II, was published in 2004. It features updated capital requirements and new ways to measure bank risk; however, the validity of these new standards was called into question during the financial crisis that began in 2008. The measures that intend to stabilize our banking system did not appear sufficient. Doubt was cast upon capital requirements, and the advantages of another system, such as contingent liability, can be seen. This thesis aims to test the effectiveness of Basel II, specifically its capital requirements, in reducing bank risk. After running a fixed effects model, one can clearly see that Basel II is insignificant in reducing bank risk, as measured by the percentage of non-performing loans to total gross loans.