Regulatory Failure and the Subprime Credit Crunch - The Importance of Basel II Regulation/Supervision

The paper provides redesigned approaches in bank risk control, as result of the latest credit crisis. The study's framework links the credit crunch causes to Basel II (BII) and Capital Requirements Directive (CRD) implementation in SMBs. A threefold approach applies: • primary data (June 2007-June 2008) by means of project implementation reports on BII compliance (Greece, Cyprus and Lebanon), resulting from consultancy work for such implementation and •secondary and tertiary data from financial websites and published academic articles. Results:A tighter regulation and supervision through a modified application of Internal Rating Based Approaches rather than the Standardised one, as well as an increase in bank divestments and M&As in the region in order to support the banking industry. The study could consider also a longer timeframe as well as a larger sample of banks. Partial differences in the accounting systems, the risk management culture and data transparency are main areas of concern, too. The paper suggests some radical and incremental solutions in applying and sharing new supervising regulations with Central Banks in order to alleviate the current banking crisis. The areas of most concern in the study are the application of BII in managing risk and the need of a 360 degrees analysis of the BII with other laws in this field. The analysis of the credit crunch unveils uncovered areas and view points where risk management needs attention not only during financial shakeout but under a matrix line of thought