Capital Regulation (Basel I), Economic Capital Allocation, and Loan Pricing I (the Equity Spread)
This chapter begins by introducing the international capital regulations known as Basel I. Next, the implications of capital regulation for loan pricing are derived. Although many countries are adopting the Basel II or III regulations, a discussion of Basel I is quite useful to understand the dynamics of the Basel regulations.
BIS CAPITAL REGULATION (BASEL I)
The medium-sized German bank Bankhaus Herstatt defaulted on June 26, 1974, at the end of the business day. Some of the bank’s counterparties had irrevocably paid deutsche marks to ...