How did Basel II amend international banking standards?

Basel II represented a significant evolution in international banking standards by emphasizing a more risk-sensitive approach to capital requirements. One of its main objectives was to ensure that banks maintain adequate capital reserves in relation to their risk exposure.

The amendment introduced a three-pillar framework, which included minimum capital requirements, supervisory review, and market discipline. This framework required banks to assess their risk profile more rigorously and hold capital accordingly. By expanding the capital holding regulations, Basel II aimed to better align capital requirements with the actual risk of the banking activities. This approach encouraged banks to strengthen their capital positions and enhance their risk management practices, ultimately leading to a more stable banking environment.

In contrast, while Basel II did address operational risk, the focus was much broader than simply controlling it. The capital requirements were not reduced; rather, they were made more stringent concerning actual risk exposure. Market liquidity was a concern but was not a primary aim of Basel II, which sought to address issues related to capital adequacy and risk sensitivity more directly.