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Economic Brief

June 2011, No. 11-06

Basel III and the Continuing Evolution of Bank Capital Regulation

Huberto M. Ennis and David A. Price

Adopted in part as a response to the 2007-08 financial crisis, the Basel III accord is the most recent revision to international capital standards for banks. Basel III primarily relies on methods similar to those of Basel II for assessing the relative risks of different types of assets. The main focus of the changes in Basel III, rather, is to increase banks' equity capital requirements. This emphasis is a reflection of the conclusions drawn from the crisis: that bank fragility is more prevalent than previously thought and that the motivation for governments to assist banks in poor financial condition is very strong during a crisis.

Additional Resources

"Basel III: A Global Regulatory Framework for More Resilient Banks and Banking Systems," Basel Committee on Banking Supervision, December 2010.

Prescott, Edward S., "Auditing and Bank Capital Regulation," Federal Reserve Bank of Richmond Economic Quarterly, Fall 2004, vol. 90, no. 4, pp. 47-63.

Prescott, Edward S., "Regulating Bank Capital Structure to Control Risk," Federal Reserve Bank of Richmond Economic Quarterly, Summer 2001, vol. 87, no. 3, pp. 35-52.

Van den Heuvel, Skander J., "The Welfare Cost of Bank Capital Requirements," Journal of Monetary Economics, March 2008, vol. 55, no. 2, pp. 298-320. (A working paper version of the article is available online.)

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