The Basle Accord of 1988 and the International Credit Crunch of 1989-1992

Abstract

The 1989-1992 credit crunch is investigated by studying changes in balance-sheet accounts and the systematic risk of banks from five countries. Banks in Canada, the United Kingdom and the United States experience an asset reallocation from loans to securities and an increase in systematic risk. Out of four hypotheses studied, only the "higher regulatory scrutiny" hypothesis is supported in all three countries, although each hypothesis is supported in at least one country. Additional findings are the Basle Accord may have given Canadian, British, and German banks a competitive advantage over U.S. banks, it may have failed to reduce the risk of international banks, and, for U.S. banks, no straightforward relationship is found between attaining balance-sheet target ratios and reducing bank systematic risk.

Keywords: credit crunch, Basle Accord, bank risk, asset reallocation, international banks

JEL Classification: G21, G28