Basel II and the associated uncertainties for banking practices

This paper aims to explore uncertainties in the interaction between Basel II and banking practices.

The research setting is a centralized bank’s risk control organization and its commercial lending operations. The bank, despite its early adoption of the Basel II Accord, experienced severe credit losses during the global financial crisis. The data consist of interviews with twelve decision-makers and risk specialists at the bank and interviews with four professionals outside the bank after the global financial crisis.

This paper finds that there are three types of uncertainties in the interaction between Basel II and banking practices. The paper also describes corroborative examples of efforts to reduce such uncertainties. Among such efforts, the decision-makers excluded the risk specialists from decision-making and decentralized decision-making to branch offices.

Although the literature generally portrays bank decision-makers and risk specialists as opposing groups, this research finds that the bank interviewees present complementary and confirmatory accounts on three types of uncertainties.

The findings suggest that increased regulatory pressure have operational implications for banking practices.

The paper has contemporary relevance with its sole focus on credit risk after the transition period provided for Basel II Accord.