The Regulator’s Response: The BIS Capital Adequacy Proposals

Abstract

In July 1988, the Bank for International Settlements (BIS) published common standards for bank capital adequacy and for the measurement of bank capital1 as agreed by the Group of Ten central banks and Luxembourg. These standards emerged as a result of several years of preliminary work and most recently an intensive process of negotiation began in December 1987 following publication by the BIS of a widely publicised consultative document.2 Against the background of deregulation of financial markets in many major industrial countries, especially the United States and United Kingdom, such standards would appear to represent an important step backwards. However, the implicit view of the BIS would seem to be that financial markets are inherently fragile. One of the prime objectives of the BIS proposals is to ‘help strengthen the stability of the international banking system’. A second objective in promoting a common set of capital adequacy standards has been ‘to remove an important source of competitive inequality for banks operating internationally’. Countries with low capital adequacy requirements place their banks at a competitive advantage over other countries. In addition, not only would capital be needed to support assets on bank balance sheets, it would also be required for off-balance sheet activities: fee-based business including trading in foreign exchange forward contracts, options, etc.