The paper examines how using credit ratings to set bank capital requirements under Basel II could lead to varying capital needs during economic ups and downs, posing risks to the financial system. It provides evidence on the potential impact and introduces a monitoring framework for regulators to track these changes. The Bank focuses on the overall impact on UK banks, while the FSA looks at individual banks' capital adequacy. The paper suggests that careful capital planning by banks and scrutiny by market participants can help prevent unintended consequences of Basel II.