Paulo Sergio Cavalheiro: Regulation of capital and financial stability Speech by Mr Paulo Sergio Cavalheiro, Deputy Governor for Supervision of the Central Bank of Brazil, at the International Seminar “The New Basel Capital Accord: Challenges and Opportunities for the Americas”, held jointly by “Centro de Estudios Monetarios Latinoamericanos - CEMLA”, “Association of Supervisors of Banks of the Americas - ASBA” and “Federación Latinoamericana de Bancos FELABAN”, in Mexico City, Mexico, 12-13 July 2004. *  *  *  The final version of the Capital Accord, also known as Basel II, has just been released. The document maintains the basic framework initially proposed, that is, three pillars, the first one dealing with the calculations of the capital requirements per se, comprising market, credit and operational risks (this last being the real novelty), the second describing the supervisory review process and the third detailing the market discipline to be achieved via disclosure. In Brazil, capital requirements were introduced by Resolution 2099, in August 94, which specified 8% of risk weighted assets as the minimum capital required. Following Resolution 2099, in October 94, Circular 2500 modified some values for minimum capital and net worth required for the establishment of banks, in accordance with the location and size of institution. The supervisory authority raised the minimum capital required to 10% of risk-weighted assets in June 97. In November 97, Circular 2784 again raised this value, this time to 11%, which is still the minimum ratio.
4  Perhaps I should point out that the academic discussion between advocates of the efficient market and those with somewhat different views is still in progress; the advent of the Behavioural Finance school has not left the former at a loss for words. 5  For an introduction to Behavioural Finance, see Shleifer, A. (2000), Inefficient markets, Clarendon Lectures in Economics, Oxford University Press. See also Shiller, R.J. (2001), Bubbles, human judgment and expert opinion, Cowles Foundation Discussion Paper 1303, Yale University. The senior economist at Föreningssparbanken has written an introduction to the subject that has also attracted attention: Fromlet, H. (2001), Behavioural finance – theory and practical application, Business Economics (July), pp. 63–69. 6  See Shiller, R. (1981), DO stock prices move too much to be justified by subsequent changes in dividends, American Economic Review 71, pp. 421–436. BIS Review 5/2002  3  explanation for these findings is that stock markets frequently over-react both upwards and 7 downwards. Something that no doubt helped to question the explanatory power of the efficient-market hypothesis was the stock market crash in 1987, when the Dow Jones index plummeted 22.6 per cent – the largest-ever one-day fall in the United States. This dramatic event demonstrated that share prices can fall even though nothing more fundamental has happened; a thorough search failed to detect any specific or unexpected development that might account for the crash.