2 The New Basel Accord and Capital Concessions

The new Basel Accord proposes an incentive, by way of a lower minimum capital ratio, for banks judged to have acceptable advanced risk management systems and which are thus to be regulated under the advanced (internal ratings based) rather than standardised approach. This paper investigates the case for such a proposed capital concession to such banks, and demonstrates circumstances under which it may be warranted. A methodology for estimating the appropriate size of capital concessions, which reflects the cost of implementing advanced risk management systems (in order to qualify for the concessions) and the value of deposit insurance, is presented – and illustrative estimates provided. The paper also considers briefly why capital concessions have been proposed rather than the alternative of adjustment to deposit insurance premiums.