Capital Requirements and Bank Performance: a Regional Analysis

The period selected for this study represents one of particular interest with respect to regional bank performance. First, it represents the five-year period immediately following the implementation in 1992 of capital adequacy requirements for banks under the Basel Accord of 1988. The basis of the Accord of 1988 was that a consistent standard be applied for determining minimum capital requirements across internationally active banks. These capital requirements were structured to make regulatory capital sensitive to differences in risk profiles across banks, with banks holding riskier assets required to hold a higher level of capital. There has subsequently been considerable debate over the impact of risk-based capital standards on bank risk-taking. Our study provides an international perspective by comparing bank capital holdings to bank share price volatility across national boundaries.