There are two schools of thought on Basel II, the regulations that specify the level of capital that banks in dozens of countries must abide by.
Supporters say the rules' risk-based approach to capital requirements stopped many banks from suffering an even worse fate in the financial crisis. They argue that the alternative, US, norm of restricting the leverage – or relative indebtedness – of a bank's balance sheet proved useless because banks simply shifted risky investments off the balance sheet.
Basel II's critics, however, insist the rules exacerbated the crisis because they allowed those that were prepared to follow the letter, but not the spirit, of the rules to increase the leverage of their balance sheets enormously, investing in assets that were nominally safe, yet in reality were anything but.
