Bank Capital Regulation, Economic Stability, And Monetary Policy: What Does the Academic Literature Tell Us‪?‬

Introduction Since 1988, under terms of the Basel Accord (now known as Basel I), national bank regulators have imposed bank capital regulations, both in the form of a traditional leverage requirement and 'risk-based' requirements relating measures of bank capital to a 'risk-weighted' measure of total assets. In light of concerns that banks had developed arbitrage techniques that undermined the intent of the Basel risk adjustments, considerable regulatory effort is under way across more than 100 nations to develop the so-called Basel II system. This new international bank regulatory framework is to be based on three 'pillars': risk-based capital requirements, discretionary supervisory discipline, and market discipline. Capital regulation is clearly the central pillar, however, with small banks facing a much more complex, risk-based capital-requirement system than under the Basel I system and large banks required to implement an even more sophisticated, internal-ratings-based (IRB) system for capital tabulation. The Basel II system is slated to go into effect gradually with a target completion date of 2011.