The impact of the 1988 Basel Accord on banks ’ capital ratios and credit risk - taking : an international study 1

The purpose of this paper is to see whether and how G-10 banks have complied with the 1988 Basel Capital Accord. The interest of this study lies in the fact that the standardized approach of the New Basel Accord is similar to the 1988 agreement. However, very little is known about the reaction of non-US banks to the imposition of fixed minimum capital requirements. Building on previous studies, this paper uses a simultaneous equations model to analyze adjustments in capital and portfolio risk at banks from G-10 countries over the period 1988-95. The results suggest that banks close to the Basel standards have generally increased their capital adequacy ratios without any offsetting increases in portfolio risk. In addition, a negative correlation is found between changes in capital and risk ratios suggesting that, everything else being equal, the capital build-up of the early 1990s was associated with a decrease in the credit risk-taking of G-10 banks.