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The impact of the 1988 Basel Accord on banks' capital ratios and credit risk-taking: an international study

Author

Listed:
  • Patrick Van Roy

    (National Bank of Belgium, Brussels)

Abstract

The purpose of this paper is to see whether and how G-10 banks have complied with the 1988 Basel Accord. The interest of this study lies in the fact that the standardized approach to credit risk in the New Basel Accord is conceptually similar to the 1988 agreement. However, very little is known about the reaction of non-US banks to the imposition of minimum capital requirements that make use of risk-weight categories. Building on previous studies, this paper uses a simultaneous equations model to analyze adjustments in capital and credit risk at banks from G- 10 countries over the 1988-95 period. The results show that regulatory pressure was successful in raising the capital to assets ratios of undercapitalized banks in Canada, Japan, the UK and the US but not in France and Italy. In addition, there is no evidence that undercapitalized G-10 banks increased or decreased their credit risk over the period studied. Interestingly, these findings are robust to the inclusion of a variable measuring the role of market discipline in influencing bank capital and risk choices. All in all, the results suggest that the 1988 Basel standards were effective in that, subsequent to their adoption, undercapitalized G-10 banks generally increased their capital but not their credit risk.

Suggested Citation

  • Patrick Van Roy, 2005. "The impact of the 1988 Basel Accord on banks' capital ratios and credit risk-taking: an international study," Finance 0509013, EconWPA.
  • Handle: RePEc:wpa:wuwpfi:0509013
    Note: Type of Document - pdf; pages: 42
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    References listed on IDEAS

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    Cited by:

    1. Boubacar Camara & Laetitia Lepetit & Amine Tarazi, 2013. "Ex ante capital position, changes in the different components of regulatory capital and bank risk," Applied Economics, Taylor & Francis Journals, vol. 45(34), pages 4831-4856, December.
    2. Sami Ben Naceur & Magda E. Kandil, 2013. "Basel Capital Requirements and Credit Crunch in the MENA Region," IMF Working Papers 13/160, International Monetary Fund.

    More about this item

    Keywords

    1988 Basel Accord; capital requirements; credit risk;

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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