However, the framework became outdated and could not adequately capture the types of risks that banks face in today’s increasingly market-based credit intermediation environment. As a result, offbalance sheet exposures as well as operational, legal and reputational risks were not appropriately identified and measured.
Moreover, liquidity supervision and regulation have failed to keep up with banks’ changing risk profiles and growing vulnerability to market-based shocks. All in all, these issues underscore the need for Basel II and the necessity to continuously improve the framework. Recent difficulties also highlighted the lack of transparency due to insufficient disclosure. CDOs of asset-backed securities are a particularly striking example.