BASEL III—Responses to Consultative
Documents, Vital Aspects of the Consultative
Processes and the Journey Culminating
in the Present Framework (Part 1)
Marianne Ojo
Response to Consultative Document
on Strengthening the Resilience
of the Banking Sector: Proposals
to Strengthen Global Capital
and Liquidity Regulations
A. Introduction
The 1988 Basel Accord was adopted as a means of
achieving two primary objectives namely:1
—“To help strengthen the soundness and stability of
the international banking system. This would be facili-
tated where international banking organisations were
encouraged to supplement their capital positions.
—To mitigate competitive inequalities”
The framework was not only oriented towards
increasing the sensitivity of regulatory capital dif-
ferences in risk profiles which exist within banking
organisations, but was also aimed at discouraging the
retention of liquid, low risk assets.2 Furthermore, it was
designed to take into express consideration, off balance
sheet exposures when assessments of capital adequacy
are undertaken.3
Ten years following the conclusion of the agree-
ment on the 1988 Accord, a Working Party was
established to evaluate the impact and achievements
of the BaselAccordZTwo principal issues which were
taken into consideration by the Working Party were:4
Firstly, whether some banks have been encouraged
Dr Marianne OjolSchooI of Social Sciences and Law Oxford
Brookes University. Oxford. (Email: [email protected] or
marianneojo @brookes.ac.uk).The second part of this article will
appear in the October issue of the Banking and Financial Services
Policy Report.
to hold higher capital ratios than would have been
the case if the adoption of fixed minimum capital
requirements had not occurred and, whether an
increase in capital or reduction of lending has resulted
in any increase in ratios. Secondly, an evaluation of
the impact of fixed capital requirements on reduced
risk taking by banks, in relation to capital, was also to
be undertaken.
In response to the first issue, relating to whether an
introduction of fixed minimum capital requirements
has led to banks maintaining higher capital ratios, some
studies which were undertaken, revealed that capital
standards, when strictly adhered to, compelled weakly
capitalised banks to consolidate their capital ratios.5 In
response to whether banks adjusted their capital ratios
to comply with requirements through an increase in
capital or a reduction of risk-weighted assets, research
revealed that banks responded to pressures stemming
from capital ratios, in a way which they perceived to
be most cost effective.6 Results obtained in response
to an evaluation of the impact of capital requirements
on risk taking were inconclusive.7 The data available
for purposes of measuring bank risk taking, were not
only limited, but also complicated the task of making
an evaluation thereof.8
Other issues which were difficult to evaluate
included whether an introduction of minimum capital
requirements for banks were detrimental to their com-
petitiveness and whether the Basel Accord facilitated
competitive inequalities amongst banks.9 These evalu-
ative difficulties, respectively, were attributed firstly, to
the fact that “long term competitiveness of banking”
depends on a variety of factors—most of which are not
connected to regulation and secondly, to the available
evidence at the time—which was inconclusive—and
hence, not sufficiently persuasive.10
26 ∙ banking & Financial Services Policy Report
Volume 30 ∙ Number 9 ∙ SeptemberlOII