Minimum capital requirements and the design of the new Basel Accord: A constructive critique

The Basel committee proposes making regulatory capital requirements more risk sensitive. Cost‐benefit assessment suggests that this yields greater efficiency in the use of regulatory capital, but has substantial enforcement and compliance costs and may well increase the severity of banking crises. Better if the new Accord sets risk‐insensitive regulatory minimum capital standards and encourages banks to set risk‐sensitive desired capital targets with generous reductions in required capital for healthy banks with effective systems of risk management. Ten specific suggestions for improvement of the new Accord are made.