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Basel II is the second of the Basel Accords, which are recommendations on banking laws and regulations issued by the Basel Committee on Banking Supervision. It is now extended and partially superseded by Basel III. The Basel II Accord was published in June 2004. It was a new framework for international banking standards, superseding the Basel I framework, to determine the minimum capital that banks should hold to guard against the financial and operational risks. The regulations aimed to ensure that the more significant the risk a bank is exposed to, the greater the amount of capital the bank needs to hold to safeguard its solvency and overall economic stability. Basel II attempted to accomplish this by establishing risk and capital management requirements to ensure that a bank has adequate capital for the risk the bank exposes itself to through its lending, investment and trading activities. One focus was to maintain sufficient consistency of regulations so to limit competitive inequality amongst internationally active banks. Basel II was implemented in 2008 in most major economies. The financial crisis of 2007–2008 intervened before Basel II could become fully effective. As Basel III was negotiated, the crisis was top of mind and accordingly more stringent standards were contemplated and quickly adopted in some key countries including in Europe and the US. The final version aims at: Ensuring that capital allocation is more risk-sensitive; Enhancing disclosure requirements which would allow market participants to assess the capital adequacy of an institution; Ensuring that credit risk, operational risk and market risk are quantified based on data and formal techniques; Attempting to align economic and regulatory capital more closely to reduce the scope for regulatory arbitrage. While the final accord has at large addressed the regulatory arbitrage issue, there are still areas where regulatory capital requirements will diverge from the economic capital.

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