What important principle about international banking

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12. What important principle about international banking was revealed by the global banking crisis of the 1990s?
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Chapter 24 - International Banking 13. How did the International Lending and Supervision Act affect international banks? How about the Basle Agreement? What are Basel I and Basel II? Answer: 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 in 1988). 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. In addition, 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.

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