Abstract
This chapter summarizes the essential elements of the current requirements, while focusing on the reaction to the Bank for International Settlements (BIS) proposals for updating them. The inter-relationships between banks mean that they have exposures to one another, while the profit motive encourages risk-taking. The systemic risk inherent in the banking system means that it is important to have adequate financial regulation, of which the capital requirements rules are one example. The BIS rules set a minimum ratio of capital to assets of 8% of the value of the assets. Assets are defined in terms of their risk and it is the weighted risk assets that are multiplied by the 8% figure. Banks use their own internal models to allocate capital according to the risk taken by each transactions department, so that finance department may analyze not only the performance of each desk in terms of return on capital employed, but also the return on the basis of the risk that has been taken on. The extent of market risk in a bank's portfolio is also of greater concern to regulators. The BIS has published proposals that require banks to set aside capital to cover for market risk as well as credit risk.
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