Bubble Value at Risk: A Countercyclical Risk Management Approach, Revised Edition

Chapter 11

Regulatory Capital Reform

The Basel Committee of Banking Supervision (dubbed “Basel”) is instrumental in the design and development of the current framework for banking regulation and capital requirements. Though not legally binding, these rules have become the de facto standard adopted globally.

This chapter begins with a short background of the Basel framework and guidance.1 We then explore the recent policy development in response to the credit crisis of 2008. Most of these policy papers came in a scramble after 2009; the new rules were eventually grouped under the Basel III framework and were scheduled for implementation in 2012 and beyond. The policy response is very comprehensive, covering many aspects of banking regulations, even though it is fair to say that the industry is still looking for all the right tools to do the job. We focus our discussion on the capital adequacy aspect of risk regulation and the calculation of minimum capital, in line with the purpose of this book.

11.1 BASEL I AND BASEL II

The Basel committee is comprised of the central bank governors of the group of 10-most-industrialized nations (or G-10). The role of Basel is to promote the safety of the global financial system and to create a level playing field among international banks. Basel is a high-level policy body. Local regulators such as central banks and banking supervisors use the Basel framework as a guide to write rulebooks for national banks under their supervision.

A core element ...