BASEL II CAPITAL ACCORD AND BANKING
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The soundness of the banking system is one of the most important issues for the regulatory authorities. It can be defined as the likelihood of a bank becoming insolvent. The lower this likelihood the higher the soundness of a bank (Greenspan, 1998, cited in Hasan, 2002: 2). Bank capital provides a cushion against failure. If bank losses exceed bank capital the bank will become insolvent. Thus, the higher the bank capital the higher is the solvency of a bank (Hasan, 2002: 2). Regulatory agencies in the United States (henceforth US) in the early 1980s became concerned over the high number of bank failures and set up minimum capital requirements for all banks, regardless of their own internal or market situation. These minimums were mandated by congressional passage of the International Lending and Supervision Act of 1983 (Rose, 2002: 489).
The year 1988 witnessed the governors of the central banks of the G10 (Group of ten most industrialised countries) introduce a new capital measurement system that came to be universally known as the Basel Capital Accord (Bardoloi, none: para.5)...