Capital requirements and bank behaviour: the impact of the Basel Accord

April 1999

The paper reviews the empirical evidence on the impact of the 1988 Basel Accord. It focuses on whether the adoption of fixed minimum capital requirements led some banks to maintain higher capital ratios than would otherwise have been the case and whether any increase in ratios was achieved by increasing capital or reducing lending. Moreover, it addresses whether fixed capital requirements have been successful in limiting risk-taking relative to capital as intended, or whether banks have been able to take actions to reduce their effectiveness, either by shifting to riskier assets within the same weighting band or through capital arbitrage. It looks at two possible side effects. Firstly, whether in some periods capital requirements may have had the effect of constraining bank lending thereby causing a credit crunch. Secondly, whether the introduction of fixed minimum requirements for banks affected their competitiveness relative to other forms of intermediation.