The New Basel Capital Accord - Comments of the European Central Bank

31 May 2001

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In its paper, the ECB welcomed the BCBS’s initiative to revise the current capital adequacy regime, though some issues still remain to be settled. In general, the ECB remains very supportive of the general thrust of the proposed new framework. The bank said the framework has many positive elements that contribute to strengthening financial stability. First, the enhanced risk sensitivity and the extended supervisory recognition of credit risk mitigation factors contribute to reducing the gap between the regulatory and economic capital. Second, the introduction of a spectrum of approaches, ranging from simple to advanced methodologies, provides banks with incentives to improve their internal control and risk management systems. Third, the interplay between the three pillars may in principle strengthen the overall effectiveness of the regulatory framework. There are some general aspects, which are relevant from the perspective of the ECB and may deserve consideration either by the BCBS when finalizing or further developing the New Accord, or by banking supervisors in the actual implementation of the framework:

The possible pro-cyclical feature of the new regime.

The structure of incentives.

The interplay among the three pillars.

The regulatory capital.

The accounting rules.

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