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Basel I Vs. Basel II

Basel I is very simplistic in its approach towards credit risks. It does not distinguish between collateralized and non-collateralized loans, while Basel II tries to ensure that
the anomalies existed in Basel I are corrected.

Advantages of Basel-II

It is believed that such an international standard can help protect the international financial system from the types of problems that might arise should a major bank or a series of banks collapse. In practice, Basel II attempts to accomplish this by setting up rigorous risk and capital management requirements designed to ensure that a bank holds capital reserves appropriate to the risk the bank exposes itself to through its lending and investment practices. In simple terms, the greater risk to which the bank is exposed, the greater the amount of capital the bank needs to hold to safeguard its solvency and overall economic stability.

The basic purpose of this recommendation is to ensure that capital allocation is more risk sensitive, separating operational risk from credit risk and quantifying both, and attempting to align economic and regulatory capital more closely to reduce the scope for regulatory arbitrage.

In a nut-shell, Basel II -