Enterprise Risk Management

CHAPTER 19Bank Capital Regulation and Enterprise Risk Management

BENTON E. GUP, PhD

Chair of Banking, The University of Alabama

INTRODUCTION

Bankers and bank regulators throughout the world are facing the challenge of dealing with globalization and the changing risk profile of banks. One aspect of this challenge is that international bank regulators have undertaken major efforts to harmonize prudential regulatory standards. Harmonization refers to uniform regulations as well as stemming divergent standards that are applied to similar activities of different financial institutions. The Basel Committee on Banking Supervision, a committee of national bank supervisors, has led the effort to establish uniform standards. In 1988, the Basel Committee established risk-based capital standards for banks. In a competitive market system, equity capital cushions debt and equity holders from unexpected losses. In regulated banking systems, required capital is used to reduce the costs of financial distress, agency problems, and the reduction in market discipline caused by federal safety nets.¹

Many countries throughout the world adopted the Basel I capital standards of holding capital of 8 percent or more of assets based on the risks of various types of assets. A study by Barth, Caprio, and Levine (2006) of more than 150 countries, revealed that minimum required capital ratios ranged from 4 percent to 20 percent of assets.

One particularly challenging problem for banks operating in multiple ...