Basel II can also provide supervisors with a more conceptually consistent and more transparent framework for evaluating systemic risk in the banking system, particularly through credit cycles. Thus it improves on Basel I, which requires banks to hold the same level of capital for a given portfolio, no matter how the portfolio’s inherent risk may change over time.
The low returns on offer on safe investments in Australia, and the ultra-low returns on such assets internationally, are certainly having an effect by prompting investors to “search for yield”. Not only are returns on financial instruments low, but yields on the existing stock of physical assets – houses, commercial property, infrastructure assets – are being bid down.