Proposals to Strengthen Global Capital and Liquidity Regulations

Introduction

The 1988 Basel Accord was adopted as a means of achieving two primary objectives namely (BIS, 1999a):

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  To help strengthen the soundness and stability of the international banking system. This would be facilitated where international banking organizations were encouraged to supplement their capital positions.

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  To mitigate competitive inequalities.

The framework was not only oriented towards increasing the sensitivity of regulatory capital differences in risk profiles which exist within banking organizations, but was also aimed at discouraging the retention of liquid, low risk assets (BIS, 1999a). Furthermore, it was designed to take into express consideration, off balance sheet exposures when assessments of capital adequacy are undertaken (BIS, 1999a).

Ten years following the conclusion of the agreement on the 1988 Accord, a Working Party was established to evaluate the impact and achievements of the Basel Accord. Two principal issues which were taken into consideration by the Working Party were (BIS, 1999a): Firstly, whether some banks have been encouraged to hold higher capital ratios than would have been the case if the adoption of fixed minimum capital requirements had not occurred and, whether an increase in capital or reduction of lending has resulted in any increase in ratios. Secondly, an evaluation of the impact of fixed capital requirements on reduced risk taking by banks, in relation to capital, was also to be undertaken.

In response to the first issue, relating to whether an introduction of fixed minimum capital requirements has led to banks maintaining higher capital ratios, some studies which were undertaken, revealed that capital standards, when strictly adhered to, compelled weakly capitalized banks to consolidate their capital ratios (BIS, 1999a). In response to whether banks adjusted their capital ratios to comply with requirements through an increase in capital or a reduction of risk-weighted assets, research revealed that banks responded to pressures stemming from capital ratios, in a way which they perceived to be most cost effective (BIS, 1999a). Results obtained in response to an evaluation of the impact of capital requirements on risk taking were inconclusive (BIS, 1999a). The data available for purposes of measuring bank risk taking, were not only limited, but also complicated the task of making an evaluation thereof (BIS, 1999a).

Other issues which were difficult to evaluate included whether an introduction of minimum capital requirements for banks were detrimental to their competitiveness and whether the Basel Accord facilitated competitive inequalities amongst banks (BIS, 1999a). These evaluative difficulties, respectively, were attributed firstly, to the fact that “long term competitiveness of banking” depends on a variety of factors – most of which are not connected to regulation and secondly, to the available evidence at the time – which was inconclusive – and hence, not sufficiently persuasive (BIS, 1999a).