Korean Banks’ Responses to the Strengthening of Capital Adequacy Requirements

The purpose of this paper is to examine Korean banks’ responses to the Basle riskweighted capital adequacy requirements implemented in 1993. The analysis indicates that while some cosmetic adjustments might have been made by partial recognition of unrealized stock losses and expected loan losses, efforts to increase capital in ways that effectively reduced risk exposure seemed to dominate the response to strengthened capital requirements. The analysis also suggests the advisability of supplementing risk-based capital requirements with leverage restrictions. The analysis also raises the question of whether the 8 percent minimum ratio of the Basle capital accord is sufficient for banks in developing countries.