In Basel I, the requirement was a proportion of total assets as per the bank’s books, with a weighting system based on the types of transactions, rather than the actual risk of each particular asset or group of assets. Starting in 1988, minimum capital requirements for banks were sequentially established by Basel I, Basel II, and Basel III. In any case, if capital is to be effective to absorb losses, it cannot be made up of fictitious assets, and should not be onerous or callable. An alternative, typical way of describing the capital of quoted institutions is as the market value of its stock. In other words, real capital is the residual amount of resources available after paying off creditors in case of liquidation. That is to say, capital is the value of assets – adjusted to reflect the repayment capacity of borrowers and the market value of traded securities– minus the liabilities. The minuend should represent the real value of assets, after updated assessment and appropriate value adjustment. From an accounting viewpoint, capital is the equivalent to net worth, i.e. Let us first remind some fundamental principles. As a result, the quality of accounting, the transparency and soundness of banking systems and the reliability of markets are seriously affected. Moreover, paradoxically, the regulatory and supervisory emphasis on capital comes hand in hand with a trend, observed in a number of countries, to forbear on asset valuation, provisions and income recognition. But, under the surface, this appears to be a nominal rather than effective fixation, at least judging by the questionable quality of some of the components of minimum capital required by regulators in Europe and elsewhere. For good reasons: capital is fundamental. Bank of Spain) | The current obsession of bank regulators worldwide is capital, reinforcing capital.
Is worrying about capital “Much Ado About Nothing”?Īristóbulo de Juan (Former Head of Banking Supervision.
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