Pressure for changes in capital adequacy regulation of banks

Abstract

The financial crisis that began in 2007 and expanded in 2008 has underscored the importance of banks capital adequacy. Although the new capital adequacy framework for banks, Basel II, which was finalised in the years preceding the crisis, can hardly be blamed for the crisis, the crisis has made clear the need for certain improvements in the new framework. Minimum capital requirements will most likely rise, and there is a need to reduce the contribution of capital requirements to procyclicality in the financial system. However, the view has also been expressed that capital requirements may not be the most efficient way of ensuring the safety of banks. These proposals focus on the idea that there should be arrangements in place that secure sufficient supply of capital to banks when it is most needed, ie when a crisis hits. This article reviews the recent discussion on capital requirements in the aftermath of the crisis.