Regulation of international banking and capital standards

Besides the undoubted advantages it implied, the intensification of international banking lead to the increase of the international financial system vulnerability. Under the conditions when banks from different countries became more and more interconnected, it was obvious that bankruptcy of a bank could have negative effects not only upon the banking system of that country but also upon the entire international banking system. The phenomenon was even more alarming because the banks which operated internationally, out of their wish to get higher profits, were making investments which were more and more risky, but which were not correlated with the level of their own funds. Thus, there appeared the need to create a framework which should put the basis of the supervision of the international banking and which should set certain standards regarding the bank capital. After many attempts, in 1988, the Basel Capital Accord is published, where for the first time there were recommended certain minimum capital requirements for the internationally active banks. Although it had a great contribution to the growth of banks capitalization and to the creation of some uniform conditions for the competition, the Basel Capital Accord had certain limits which lead to its reform. Therefore, in June 2004, a new agreement was adopted which due to its provisions, correlates in a better way the own funds of a bank with its risk profit. The New Basel Capital Accord is going to be implemented at the end of 2006.