The New Basel Capitol Accord: Is 8% Adequate?

Abstract

The 1988 Basel Accord established 8% of risk weighted assets as the minimum equity capital standard that reflected bank risks at that time. The New Basel Capital Accord, to be implemented in 2006, maintains the 8% equity capital as the minimum standard, and it changes with the way the capital standard is computed in order to take certain risks into account. Nevertheless, this article argues that it does not reflect the higher degree of risks that banks face today. These risks include more off-balance sheet derivatives, real estate loans, subprime loans and over-exposure to equities. Because of the increased risks, a higher equity capital ratio is needed.

Keywords: Keywords, Banking, Capital, Regulation

JEL Classification: G21, G28