Chapter 24 - International Banking
How did the International Lending and Supervision Act affect international
banks? How about the Basle Agreement? What are Basel I and Basel II?
If international banks are to survive and prosper in the future, they must retain
the public’s confidence and control the incidence of excessive risk-taking.
One of the
most important ways to accomplish this goal in recent years has been to impose common
capital requirements on all banks in leading industrialized countries (through Basle
Agreement on Bank Capital Standards, signed by all participating industrialized nations
These common regulatory standards – a product of unique cooperation among
many nations – have been changed and modified frequently in recent years to broaden the
kinds of risk measurement and risk protection that international banks use.
the federal law known as the International Lending and Supervision Act, which was
passed in 1983, requires U.S. banks to increase their capital and to pursue more prudent
international loan policies.
Basel I Agreement
An agreement among the central banks of leading industrialized
nations of Western Europe, Canada, the United States, and Japan, formally approved in
1988, that imposed common capital requirements upon all their banks in order to control
bank risk exposure (Chapters 17). Each banking firm will be asked to develop its own
internal models for determining its unique level of risk exposure and its corresponding
need for capital. Moreover, each international bank will be required to “stress test” its
asset portfolio under a variety of possible market conditions.
Basel II Agreement
Revisions to the Basel I Agreement allowing each bank in leading
industrialized countries to determine its own risk exposure and required level of capital
based, in part, on stress testing its asset portfolio (Chapters 17). The Basel II Accord is
designed to establish a flexible system for determining bank capital requirements that can
be adjusted to shifting market conditions and innovations that clever international
bankers frequently devise.