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Article: Auditing and bank capital regulation.
- Article from:
- Economic Quarterly
- Article date:
- September 22, 2004
- Author:
CopyrightCOPYRIGHT 2004 Federal Reserve Bank of Richmond. This material is published under license from the publisher through the Gale Group, Farmington Hills, Michigan. All inquiries regarding rights should be directed to the Gale Group. (Hide copyright information)
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Capital regulations for banks are based on the idea that the riskier a bank's assets are, the more capital it should hold. The international 1988 Basel Accord among bank regulators set bank capital requirements to be a fixed percentage of the face value of assets. The only risk variation between assets was based on easily identifiable characteristics, such as whether it was a commercial loan or a government debt.
The proposed revision to the Accord, commonly called Basel II, is an attempt to improve upon the crude risk measures of the 1988 Accord. Under Basel II, banks use their internal information systems to determine the risk of an asset and report this number ...