Basle 2 : The route ahead or cul de sac
by Richard Brealey | Journal of Applied Corporate Finance, Fall 2006
This article examines some strategic issues pertaining to Basle 2.
The new Basle accord is expected to enhance banks’ safety and
soundness, strengthen the stability of the financial system as a
whole, and improve the financial sector’s ability to serve as a
source for sustainable growth for the broader economy. But the
record of success of past changes to the regulatory system in
reducing bank failures suggests that this may be a somewhat rosy
assessment. While an increase in capital requirements may reduce the
incidence of bank failure, its efficacy depends on the accuracy and
frequency with which bank assets are valued. Brealey argues that the
right way is to move toward an explicit system for regulatory
purposes of market-value accounting for bank assets.