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Document Type

Case Studies

Abstract

From the earliest efforts to mandate the amount of capital banks must maintain, regulators have grappled with how best to accomplish this task. Until the 1980s, regulation had been based largely on discretion and judgment. In the wake of two bank failures, the central bank governors of the G10 countries established the Basel Committee on Banking Supervision (BCBS) and in 1988, the BCBS introduced a capital measurement system, Basel I. The system represented a triumph of the fixed numerical approach, however, critics worried that it was too blunt an instrument. In 1999, the BCBS issued Basel II, a proposal to add supervisory review and disclosure components to the minimum capital requirement methodology of Basel I. Basel II represented a synthesis of the dueling approaches to capital regulation, however some argued that the new standards led to an explosion in the complexity of financial regulation. This case explores the history of the efforts to regulate bank capital that led to Basel II and set the stage for Basel III.

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