Banking Stability and the Basel Capital Standards

Abstract

In thinking about bank stability and the Basel Accord, rather than concentrating on whether the Basel Committee has gotten every little detail of the new Accord right—a task that can greatly affect banks’ bottom lines—it is more appropriate for our present purposes to concentrate on some more general—and perhaps fundamental— questions.1 How successful has the original Basel Accord been in accomplishing its stated goals? How successful will Basel II be in accomplishing those goals? Are those goals desirable? And perhaps the most fundamental question of all: Is the Basel Accord—that is, the international harmonization of capital standards—necessary or desirable to have a stable financial system? Theoretical and Historical Background In 1988 the Basel Committee on Banking Supervision completed the Basel Capital Accord after years of deliberations that followed the Latin American sovereign defaults of 1982. The Basel Accord was established with two fundamental objectives: to strengthen the soundness and stability of the international banking system and to obtain “a high degree of consistency in its application to banks in different countries with a view to diminishing an existing source of competitive inequality among international banks ” (Basel Committee on Banking Supervision 1988). To that end, the accord requires that banks meet a minimum capital ratio that must be equal to at least 8 percent of total risk-weighted assets. The Basel Committee on Banking Supervision concentrated on capital standards for two reasons: first, because Congress instructed

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