he increased prominence of trading activities at many large banking companies has highlighted bank exposure to market risk—the risk of loss from adverse movements in financial market rates and prices. Recognizing the importance of trading operations, banks have sought ways to measure and to manage the associated risks. At the same time, bank supervisors in the United States and abroad have take...

The purpose of this paper is to examine Korean banks’ responses to the Basle riskweighted capital adequacy requirements implemented in 1993. The analysis indicates that while some cosmetic adjustments might have been made by partial recognition of unrealized stock losses and expected loan losses, efforts to increase capital in ways that effectively reduced risk exposure seemed to dominate the r...

Some advocates of far higher capital requirements for banks invoke the Modigliani-Miller theorem as grounds for judging that associated costs would be minimal. The M&M theorem holds that the average cost of capital to the firm is independent of capital structure, because any reduction in capital cost from switching to higher leverage using lowercost debt is exactly offset by an induced increase...

Critics claim that capital requirements can exacerbate credit cycles by restricting lending in an economic downturn. The introduction of Basel 2, in particular, has led to concerns that risksensitive capital charges are highly correlated with the business cycle. The Basel Committee is contemplating a revision of the Basel Accord by introducing counter-cyclical capital buffers. Others claim that...

The period selected for this study represents one of particular interest with respect to regional bank performance. First, it represents the five-year period immediately following the implementation in 1992 of capital adequacy requirements for banks under the Basel Accord of 1988. The basis of the Accord of 1988 was that a consistent standard be applied for determining minimum capital requireme...

Capital requirements play a key role in the supervision and regulation of banks. The Basel Committee on Banking Supervision is now changing the current framework by introducing risk-sensitive capital charges. There have been concerns that this will unduly increase volatility in the banks’ capital. Furthermore, when the credit supply is rationed, capital requirements may exacerbate an economic d...

ince the early 1980s, bank supervisors have made significant strides with regard to capital requirements. The last fundamental change in the United States followed the 1988 Basle Accord, which contained explicit requirements for off-balance-sheet positions as well as more conventional standards based on the balance sheet. At present, supervisors are contemplating further steps in the refinement...

This paper develops a structural, dynamic model of a banking firm to analyse how banks adjust their loan portfolios over time. In the model, banks experience capital shocks, face uncertain future loan demand, and incur costs based on their proximity to regulatory minimum capital requirements. Non-linear relationships between bank capital levels and lending are derived from the model, and key pa...

We consider an economy in which flat capital requirements are costly because they inefficiently reduce lending when aggregate conditions are unfavorable. Countercyclical capital requirements – which impose lower capital demands in bad aggregate states – have the potential to improve welfare. However, we show that such capital requirements also have a cost as they increase systemic risk taking a...