Risk‐based capital requirements and their impact upon the banking industry: Basel II and CAD III
| Published date | 01 September 2004 |
| DOI | https://doi.org/10.1108/13581980410810803 |
| Date | 01 September 2004 |
| Pages | 225-239 |
| Author | Rosa Maria Lastra |
| Subject Matter | Accounting & finance |
Risk-based capital requirements and their
impact upon the banking industry: Basel II
and CAD III
Rosa Maria Lastra
Received: 25th May, 2004
Centre for Commercial Law Studies, Queen Mary, University of London, 13 Charterhouse Square,
London EC1M 6EY, UK; tel: +44 (0)20 7775 3319; e-mail: r.lastra@qmul.ac.uk
Rosa Maria Lastra is a senior lecturer in
International Financial and Monetary Law
at the Centre for Commercial Law Studies,
Queen Mary, University of London. She
is a member of the European Shadow
Financial Regulatory committee and an
associate member of the Financial
Markets Group of the London School of
Economics.
ABSTRACT
KEYWORDS: bank capital regulation, Basel
II, CAD III
The Basel Committee has proposed a new
capital framework to respond to the deficiencies
of the 1988 Capital Accord (Basel I). The
1988 Accord has been criticised for its crude
assessment of risk and for creating opportunities
for regulatory arbitrage. In principle, the new
approach, often referred to as Basel II, is not
intended to raise or lower the overall level of
regulatory capital currently held by banks, but
to make it more risk sensitive. The spirit of the
new Accord is to encourage the use of internal
systems for measuring risks and allocating
capital (the Accord extends the use of internal
models from market risk to credit risk). A
number of issues have been raised, however,
with regard to its complexity, its cost, its
impact on procyclicality, the possibility that it
can lead to competitive distortions if some coun-
tries do not apply it (some big emerging econo-
mies) or apply it differently to small and big
institutions (the USA) and others. Banks in
Europe will also be obliged to comply with the
new Capital Directive, often referred to as
CAD III, which is the means by which the
EU will implement the new Basel Capital
Accord. CAD III will apply to all credit
institutions and investment firms and not only
to internationally active banks, as Basel does.
This paper presents a critical approach to these
developments and examines their impact upon
the banking industry.
INTRODUCTION
‘The distinctive feature of the banker,
says Ricardo, begins when he uses the
money of others; as long as he uses his
own money he is only a capitalist’.
1
This paper is divided into six sections. The
first section surveys the rationale of capital
requirements as a core instrument of bank-
ing regulation and the limitations of such
an approach. The second section surveys
the reasons why capital adequacy has
become a major strategic theme for bank
managers. The third section provides a
revisionist account of Basel I, including a
brief survey of the adjustment techniques
Page 225
Journal of Financial Regulation and Compliance Volume 12 Number 3
Journal of Financial Regulation
and Compliance, Vol. 12, No. 3,
2004, pp. 225–239
#Henry Stewart Publications,
1358–1988
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