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Capital Accord

The minimum standards promulgated by consensus in the Basel Committee on Banking Supervision are regarded as a global benchmark by dint of their convincing substance and the support of the G10 central bank governors and finance ministers, although they are without any supranational force and effect. Probably the most significant regulatory work is the “Capital Accord”. The Capital Accord defines a minimum standard for eligible capital and capital adequacy requirements. Since it was first established, the Capital Accord has been revised in places on several occasions. Whereas it originally only applied explicitly to credit risks, it has been extended to include market risks since 1996. The banks’ capital adequacy ratio as defined by the Capital Accord - often referred to as the BIS ratio - must be at least 8 percent of a bank’s risk-weighted assets. The BIS ratio is included by many banks in their reporting as an indicator of their solvency and is used as a key assessment criteria by rating agencies as one of their key assessment criteria. In 1998 the Basel Committee initiated a comprehensive revision of the Capital Accord (Basel II) which was completed in 2004 and is scheduled to be implemented in national law in 2007. Its aim is to record the risks involved in banking in a more complete and differentiated manner by recognizing external and internal credit risk rating systems and by including operational risks in the calculation. Moreover, the first – and hitherto sole – pillar of the Capital Accord relating to minimal capital adequacy requirements is to be enlarged. On the one hand through individualised supervisory methods tailored to the specific institution involved (supervisory review process, 2nd pillar), and on the other through increased disclosure of risks and equity capital levels ratios with a view to strengthening supervisory efforts (3rd pillar, market discipline).

© 2008 EBK

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