Risk-Based Regulatory Capital and the Basel Accords

Abstract Regulators impose minimum capital adequacy requirements on banks to mitigate moral hazard and reduce systemic risk and deadweight loss arising from bank failures. The Basel II reform to the original 1988 Basel Accord aimed to better align regulatory capital requirement with banks’ own risk management practices. In the wake of the financial crisis that began in 2008, Basel III addresses many of the shortcomings revealed. This chapter reviews the development of the Basel Accords and in particular the theoretical and empirical underpinnings for the derivation of capital requirements.