Proposals for the inclusion of general provisions / general loan-loss reserves in capital

In July 1988 the Basle Committee on Banking Supervision, with the endorsement of the central bank Governors of the Group of Ten countries, reached agreement on a framework for measuring capital adequacy and for applying a minimum capital standard to banks engaged in international business. 

The definition of capital in the Accord is structured according to quality. The amount of the highest quality capital (tier 1 or core capital) is unlimited. Capital elements of lesser quality (tier 2 or supplementary capital), which include general provisions and loan-loss reserves, are admitted up to an amount equal to that of core capital (i.e. core capital must comprise at least 50% of the eligible total). Within the tier 2 elements there is a further constraint in that subordinated debt is limited to 50% of tier 1 capital. 

In concluding the July 1988 Accord, particular difficulty was experienced in defining general provision or general loan-loss reserves (see paragraphs 18-21 of the final text). The Committee has examined this aspect further and is now presenting proposals which it believes will clarify the definition of capital and significantly improve the quality of the capital employed in the international banking system. The details are set out in the attached annex, which is drafted in the form of a proposed amendment to paragraphs 18-21 of the main text and paragraph D of Annex 1 of the Capital Accord. 

Since the proposals constitute an amendment to the 1988 Accord, a period for consultation with commercial banks and other interested parties is envisaged. This consultative process will be handled at national level in the first instance and the Committee will coordinate the comments and responses made to individual member supervisory authorities. The closing date for the receipt of comments will be set by national supervisors, but the Committee intends to issue a final amendment to the 1988 Accord in the second half of 1991.