Consequently, the new rules are being designed to recognize the underlying risk while not discouraging or penalizing banks that wish to remain involved in venture capital and equity investing. Our goal is to create a capital approach to equity exposures that builds upon sound internal bank practice and remains flexible enough to apply in any country. Our challenge is to develop a treatment that makes sense today and that will be responsive to the evolution of banks’ practices in equity funding. An equally important consideration is implementation, given significant differences in the nature of banks’ equity holdings across countries and in the ways in which capital markets have evolved over time in each country. The Committee wants to avoid disrupting equity holdings that have developed under existing capital regulations --- whether these are long-term holdings, such as in Germany, or those associated with small business investment corporations in the United States. To this end, only new equity investments would be captured under the internal ratings-based approach for the first ten years after the date that the new Accord is implemented. This is an area where the Committee has tried to navigate differences between national practices. We see the best way forward as offering two approaches to calculating regulatory capital for banks’ equity exposures, one based on measures of market risk and a second based on the treatment of corporate loans. In either case, we intend for both methods to result in comparable capital requirements, which we will seek to confirm through our next impact study.
At that point, I look forward to hearing and learning from you in what I hope will be a rich discussion session. Purpose of regulatory capital First, let’s look back for a moment to understand the path we’ve taken. The Basel Committee has long sought ways to ensure that banks hold sufficient capital relative to the risks they face. Capital, of course, helps individual banks to weather unexpected losses. On a macro scale, requiring all banks to maintain adequate levels of capital helps to safeguard the stability of the financial system. When a financial system is more stable, banks are better able to provide businesses and consumers with funding and credit through good times and bad, which promotes the long-term growth of the economy. The risks involved in lending and borrowing have long been recognized, “For [a] loan oft loses both itself and friend,” warned Shakespeare some centuries ago. For their part, banks – like all companies  BIS Review 27/2002  1  – seek a healthy balance between risk and opportunity. Because banks serve as key intermediaries of credit within the economy, poor credit decisions harm not just banks, but borrowers as well. Overly restrictive terms for credit make loans less accessible to all businesses, impeding their ability – and that of the economy – to grow. If the terms for credit are too lax, loans may be extended in volumes that borrowers ultimately may be unable to repay in full.