THE BASLE COMMITTEE’S PROPOSALS FOR REVISED CAPITAL STANDARDS: RATIONALE, DESIGN AND POSSIBLE INCIDENCE

Andrew Cornford

No 3, G-24 Discussion Papers from United Nations Conference on Trade and Development

Abstract: The Basle Capital Accord of 1988 was the outcome of an initiative to develop more internationally uniform prudential standards for the capital required for banks´ credit risks. The objectives of the Accord were not only to strengthen the international banking system but also to promote convergence of national capital standards, thus removing competitive inequalities among banks resulting from differences on this front. The key features of this Accord were a common measure of qualifying capital, a common framework for the valuation of bank assets in accordance with their associated credit risks (including those classified as off-balance-sheet), and a minimum level of capital determined by a ratio of 8 per cent of qualifying capital to aggregate risk-weighted assets. The 1988 Basle Agreement was designed to apply to the internationally active banks of member countries of the Basle Committee on Banking Supervision but its impact was rapidly felt more widely and by 1999 it formed part of the regime of prudential regulation not only for international but also for strictly domestic banks in more than 100 countries. From its inception the 1988 Basle Accord was the subject of criticisms directed at features such as its failure to make adequate allowance for the degree of reduction in risk exposure achievable through diversification, at the possibility that it would lead banks to restrict their lending, and at its arbitrary and undiscriminating calibration of certain credit risks. In the aftermath of the East Asian crisis other issues of special interest to developing countries also became a focus of attention: firstly, the Accord´s effectiveness in contributing to financial stability in developing countries; and, secondly, the incentives which the Accord was capable of providing to short-term interbank lending, a significant element of the volatile capital movements perceived as having contributed to the crisis.

Date: 2000
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