International Bank Capital Standards: Next Steps

Abstract

The Basel bank capital standards constitute one of the most ambitious international efforts ever undertaken to set common rules for firms competing within and across national borders. After several years of negotiation among the central banks on the Basel Committee—named after the city in which it was formed in 1975—the Basel standards responded to two concerns. One was a fear about the fragility of international banks and the cross-border implications of their failure—initially prompted by the failure of Bankhaus Herstatt in 1974 and later reinforced in the 1980s by the precarious positions of many larger banks that had large exposures to Latin American sovereign governments. Central banks and their governments who were represented on the committee, however, did not want to strengthen bank capital requirementsthe obvious solution for reducing cross-border risks—unless all countries did so simultaneously. Otherwise, banks in countries that tightened the standards would be put at a competitive disadvantage relative to those countries that stood still. Accordingly, a second strong motivation for the standards was the desire to level the playing field for large international banks.