Managing Bank Capital: Capital Allocation and Performance Measurement, 2nd Edition

6

Regulatory Capital Requirements

Some think no accord at all would be better than a bad one.¹

The term “regulatory capital” applies to the minimum capital requirements which banks are required to hold, based on the regulations established by the banking supervisory authorities. Chapter 1 showed how these requirements have developed, and the role of the Basel Committee on Banking Supervision in this process. This chapter will examine in a bit more detail the nature of the framework (the Basel Accord), and highlight some of its strengths and weaknesses. The subsequent two chapters are detailed chapters which the reader looking for an overview of the subject may skip: Chapter 7 looks at the existing Basel framework in detail, and Chapter 8 looks at the main problems with the Accord, especially the increasing level of regulatory capital arbitrage, and examines the possible future developments in response to these.

The international guidelines established by the Basel Accord have been applied broadly consistently within the G10 countries, but some differences may exist. This chapter will look at regulatory capital in a general sense and will thus always refer to the Basel guidelines. Whereas individual regulatory environments may diverge from these, the broad framework remains the same: it is not within the scope of this book to provide a point-by-point analysis of the rules which apply in any one country, and the reader should be aware that the Basel Accord itself is constantly ...