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The New Basel Capital Accord

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The New Basel Capital Accord

Thomson Texere,

15 min read
10 take-aways
Text available

What's inside?

Tour the benefits and pitfalls of the new Basel Capital Accord, to be implemented by the world's largest banks in 2006.

Editorial Rating

6

Qualities

  • Overview
  • Background

Recommendation

This collection of articles and academic studies varies widely in tone and readability, but provides a much-needed critical look at the new Basel Capital Accord (Basel II). This international agreement on bank capital standards, scheduled to replace the 1988 Basel Capital Accord (Basel I) in 2006, will directly affect 10 to 20 of the biggest banks in the U.S., but may have a ripple effect on smaller institutions. The expert authors gathered here agree that Basel I, though ground-breaking and necessary, was too simplistic. However, the solutions proposed by Basel II create new problems in addition to solving old ones. Just as Basel I did not prevent the worldwide financial crises of the late 1980s and early 1990s, new problems are already arising that are not adequately addressed by Basel II. The new accord is an important step, but may best be understood as an evolving process rather than a set of ironclad rules. getAbstract.com recommends this book to bank regulators, managers of large banks and anyone else with a vested interest in international banking standards.

Summary

History of the Basel Framework

In 1974, the Cologne, Germany-based bank Bankhus I.D. Herstatt failed. Because it processed many foreign exchange transactions, its failure had worldwide impact. To prevent such catastrophes, the central bankers from 13 countries (Belgium, Canada, France, Germany, Italy, Japan, Luxembourg, the Netherlands, Spain, Sweden, Switzerland, the United Kingdom and the U.S.) formed the Basel Committee on Banking Supervision, headquartered at the Bank For International Settlements (BIS) in Basel, Switzerland.

The Basel Committee has evolved into a group that sets international standards for banking. Although the Committee's "best practices" standards are recommendations with no binding force internationally, more than 100 countries use these recommendations in their banking systems. For example, U.S. bank regulators require all FDIC-insured banks to meet Basel standards to qualify as "adequately capitalized." Banks that fail to meet this standard are subject to the prompt corrective action (PCA) measures specified in the 1991 FDIC Improvement Act (FDICIA). These regulatory sanctions are quite strict and include putting the bank into receivership...

About the Author

Dr. Benton E. Gup’s other books include The Future of Banking, Megamergers: Causes and Consequences and The New Financial Architecture: Banking Regulation in the 21st Century. His articles have appeared in numerous publications including the Journal of Finance and Financial Management. He is a member of the Academy of Financial Services and the American Finance Association, among other organizations.

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