To understand why Basel III has been structured the way it has, we need to take a look at what necessitated such an approach in the first place. The standard for lending teams the world over before the global financial crisis was Basel II. Lenders across the globe were both excited and daunted by this accreditation standard. On retail lending lines alone, there was phenomenal regulatory capital release moving portfolios off Basel I into Basel II Risk Weighted Asset (RWA) processes.

The amount spent on improving credit risk modelling programs was massive across the banking sector. Some medium-sized national banks in the western world were spending more than $80–$90 m to bring their credit risk systems into Basel II Internal Ratings Based (IRB) approach.  This was a small sum to pay when regulatory capital release on the entire retail banking book could be $2 billion or $3billion to switch to Basel II; that is a huge payback.

Banks also had a good argument to move to Basel II as the realised losses that Basel I was pricing into capital had not materialised, and it seemed that the time for moving to a risk-sensitive approach for modelling credit internally had arrived.  

 A US problem

Nearly all the counties embraced this new standard, with Europe the first to do so and Japan and Australia following closely behind.  When a standard is imposed and banks are institutionally motivated, industry response is usually broad and deep. Across Asia a flurry of Basel II analysts, risk software companies and consultants engaging institution after institution.  Some great work was done.

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