AccessMyLibrary provides FREE access to millions of articles from top publications available through your library.
International capital standards for the banking industry were first proposed in 1988 by the Bank for International Settlements (BIS), located in Basel, Switzerland. The proposal required a minimum capital standard (8%) for all banking organizations and was adopted on a global basis. Known as the Basel Accord, the minimum capital standards have been widely credited with enhancing the stability of the international banking system.
The Basel Accord became effective in 1992 and required banks worldwide to raise a significant amount of capital. The 50 largest bank holding companies in the U.S. issued more than $14 billion of common and preferred stock in 1991 alone. Today, U.S. banks must hold capital greater than 10% of total assets to be considered well capitalized. The industry as a whole has a very strong capital position and some would argue that it is indeed over-capitalized.
At the time of the Accord's unveiling, however, the banking industry was under tremendous pressure. Large banks were heavily burdened with LDC debt, the S&L crisis was unfolding, and record numbers of smaller institutions were failing. The next few years brought no improvement as the industry's problems were only compounded when the real estate market collapsed. A Time magazine cover in early 1993 asked, "Are Banks Obsolete?" Coupled with the heavy credit losses at the time, the adoption of the Basel Accord produced a lot of pain for the banking industry.
Hopefully, history is not about to repeat itself. Implementation of a new Capital Accord is set for 2005, and 2001 is proving to be a year in which the industry is experiencing rising loan losses. Moreover, proposals put forth thus far by the regulators would require considerably more capital than most banks' own internal economic capital systems calculate. Regulators are currently working to recalibrate the capital estimation process laid out in the preliminary Basel reform proposals. Hopefully, they'll rely on best practices employed by the industry. Otherwise, history could indeed repeat itself.
The 1988 Accord was called the Risk-Based Capital Accord, but it was that in name only. It was largely an arbitrary, one-size-fits-all capital charge. The new Accord will be much more risk sensitive. It will require additional capital for activities that are more risky and less capital for those that are not.