Banks need to engage with their customers in a sensible and proactive manner with a view to finding long-term solutions that work for both parties. A sustainable restructure is good for the borrower and for the lender, including in retaining interest income. These long-term benefits are not always being given sufficient prominence relative to shorter-term capital relief.
And under Basel I, a bank's capital requirement does not reflect deterioration in asset quality. Moreover, the balance-sheet focus of Basel I does not adequately capture risks of certain off-balance-sheet transactions and fee-based activities--for example, the operational risk embedded in many of the services from which many large U.S. institutions generate a growing portion of their revenues.