Market discipline is to be enlisted by requiring greater disclosure of risks facing a bank. While Basel 1 was a Capital Accord, Basel 2 is an accord having three pillars – capital requirements, regulatory validation and market discipline. The real question remains unanswered. Is the closer alignment of regulatory capital with economic capital good public policy?
The media has been reporting that while interest rates on housing loans have declined, deposit interest rates have also declined, asking whether the net impact of the policy for households is negative or positive. The answer is very clear. Individuals and firms as a whole will definitely benefit from this policy (Chart 1).