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ADVERSE IMPLICATIONS OF BASEL 2

James S. Sagner

University of Bridgeport USA

 

ABSTRACT

Recent global financial system problems are forcing governments to consider strengthened regulation, supervision and capital adequacy rules. The Basel 2 Accords require banks to maintain levels of Tier I and Tier II capital that may be difficult to attain based on recent financial statements of international financial institutions. Using available public data, this paper analyzes the capital shortfall for 24 banks in seven countries, contrasts these results to that of major U.S. banks, and calculates the percentage of GDP represented by this additional financing. Various conclusions are developed regarding the potential adverse implications of implementation, including a decrease in lending, reduced economic activity, increased cost of bank capital, a questionable relationship between capital and lending, high costs of implementation, and competitive dislocations.

JEL codes: F33, G21, G28