Capital Adequacy in Financial Institutions: Basel Proposals

Abstract

The Basel Committee s proposal for a new capital adequacy standard was released in June 1999, with comments due by the end of March 2000.1 There is a desire to issue another proposal around the end of the year. The approach is based on three pillars. First, there are minimum capital requirements that banks have to meet; second, there is a supervisory review of capital; and third, there is market discipline. Another key aspect of the proposal in addition to introducing the three pillars is the desire to move to a more risk sensitive approach to the minimum requirements. Earlier in this conference volume, Professor Altman explained well why the broad-brush approach to minimum capital requirements of the current Basel Accord has created perverse incentives to shed low risk assets and hold more high-risk assets.2

The views expressed here are those of the author and not necessarily those of the Federal Reserve Bank of New York or the Federal Reserve System.