The new accord will introduce a mechanism that acknowledges any deterioration in the value of financial institution’s loan assets at an early stage and requires banks to promptly increase their capital relative to the risks associated with a loan project and any change in degree of risk.
Under the current 1998 Basel Capital Accord, financial institutions are required to hold the minimum requirement of 8 percent of capital to corporate loans, while under the new accord they will estimate the probability of default associated with each borrower according to its business condition and hold capital based on such estimates.