In June of 2004, central bank governors and the heads of bank supervisory authorities in the Group of Ten (G10) countries endorsed the publication of a new capital adequacy framework, titled Basel II: International Convergence of Capital Measurement and Capital Standards: a Revised Framework (better known as Basel II). It replaces the 1988 Basel Capital Accord (Basel I).3 Basel II, the full implementation of which is targeted for year-end 2007, would maintain the current “capital ratio” target, but would change the manner by which the inputs to that ratio are calculated. In addition, Basel II provides for enhanced supervisory and disclosure requirements. Along with significantly impacting the lending and trading behaviour of compliant banks, Basel II has important transfer pricing implications for those institutions that adopt it, including potential tax-planning opportunities. This article will highlight some of these implications.
By Sherif Assef and Dean Morris, published in Journal of Derivatives and Financial Instruments (IBFD), July/August 2005