The impact of the 1988 Basel Accord on banks' capital ratios and credit risk-taking: an international study

Patrick Van Roy

Finance from University Library of Munich, Germany

Abstract: The purpose of this paper is to see whether and how G-10 banks have complied with the 1988 Basel Accord. The interest of this study lies in the fact that the standardized approach to credit risk in the New Basel Accord is conceptually similar to the 1988 agreement. However, very little is known about the reaction of non-US banks to the imposition of minimum capital requirements that make use of risk-weight categories. Building on previous studies, this paper uses a simultaneous equations model to analyze adjustments in capital and credit risk at banks from G- 10 countries over the 1988-95 period. The results show that regulatory pressure was successful in raising the capital to assets ratios of undercapitalized banks in Canada, Japan, the UK and the US but not in France and Italy. In addition, there is no evidence that undercapitalized G-10 banks increased or decreased their credit risk over the period studied. Interestingly, these findings are robust to the inclusion of a variable measuring the role of market discipline in influencing bank capital and risk choices. All in all, the results suggest that the 1988 Basel standards were effective in that, subsequent to their adoption, undercapitalized G-10 banks generally increased their capital but not their credit risk.

Keywords: 1988 Basel Accord; capital requirements; credit risk (search for similar items in EconPapers)
JEL-codes: G21 G28 (search for similar items in EconPapers)
Pages: 42 pages
Date: 2005-09-11
New Economics Papers: this item is included in nep-fin, nep-fmk and nep-reg
Note: Type of Document - pdf; pages: 42
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:wpa:wuwpfi:0509013

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