The stability of the banking sector is an essential precondition for a well-functioning economy. Enhancing this stability was one of the main motivations for the elaboration of the new capital adequacy framework, Basel II. The present paper examines the impact of Basel II on risk allocation in...

We examine the prudential implications of the co-existence between the standardized approach and the internal ratings-based (IRB) approach, as defined in the new Basle Accord. We consider a model in which sophisticated banks, eligible for the IRB approach, and unsophisticated banks, eligible for...