Abstract

Responsible risk management is central to banking ethics. With the 1999 publication of the Basel Committee's proposal, Basel II, for a New Capital Accord to replace the 1988 agreement, Basel I, an attempt has been made to address the problem of correlating banks' risk management with their capital requirements. The Basel II framework, finalised in June 2004, is designed to improve risk management by using models based on past performance to help set the amount of capital banks are required to hold by regulators, with the purpose of improving the efficiency of capital allocation. The objectives of this study are to investigate how banks generally, but particularly those located in China, could improve their risk management systems and what the implications of these new regulations are for them. Three relevant propositions were formulated, namely, Basel II will improve risk management; Basel II will improve capital allocation efficiency; and compliance with advanced risk management systems is biased in favour of the large banks. Evidence was assembled with which to evaluate these three propositions by gathering relevant primary data by means of a representative survey of Chinese banking executives involved in risk management. The findings strongly support the first two of the above propositions and partly support the third proposition