Premium
The New Basel Capital Accord: Making it Effective with Stronger Market Discipline
Author(s) -
Benink Harald,
Wihlborg Clas
Publication year - 2002
Publication title -
european financial management
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.311
H-Index - 64
eISSN - 1468-036X
pISSN - 1354-7798
DOI - 10.1111/1468-036x.00178
Subject(s) - market discipline , capital requirement , risk adjusted return on capital , incentive , basel ii , risk weighted asset , capital adequacy ratio , debt , business , bank regulation , capital (architecture) , basel iii , economics , accounting , financial system , finance , financial capital , microeconomics , capital formation , market economy , human capital , archaeology , history
In January 2001 the Basel Committee on Banking Supervision proposed a new capital adequacy framework to respond to deficiencies in the 1988 Capital Accord on credit risk. The main elements or ‘pillars’ of the proposal are capital requirements based on the internal risk‐ratings of individual banks, expanded and active supervision, and information disclosure requirements to enhance market discipline. We discuss the incentive effects of the proposed regulation. In particular, we argue that it provides incentives for banks to develop new ways to evade the intended consequences of the proposed regulation. Supervision alone cannot prevent banks from ‘gaming and manipulation’ of risk‐weights based on internal ratings. Furthermore, the proposed third pillar to enhance market discipline of banks’ risk‐taking is too weak to achieve its objective. Market discipline can be strengthened by a requirement that banks issue subordinated debt. We propose a first phase for introducing a requirement for large banks to issue subordinated debt as part of the capital requirement.