Banks face higher losses in economic downturns under Basel II guidelines.
The Basel II framework helps banks manage risks by using internal ratings to assess the likelihood of borrowers defaulting on loans. Banks also consider how much they might lose if a borrower does default. During tough economic times, losses from defaults can be higher than usual. Banks often evaluate these risks on a loan-by-loan basis rather than looking at the overall portfolio. Different banks have different methods for rating risks, from using statistical models to relying on judgment.