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When Bank Capital Standards Aren't Actually That Standard 

July 20, 2016

Tracy Alloway, BloombergMarkets

A new Federal Reserve working paper lays bare the degree to which ostensibly black-and-white rules set by the Basel Committee on Banking Supervision differ in their implementation.

At issue is the way in which countries can enforce requirements under Basel bank capital adequacy standards first introduced in 1988 and subsequently updated in 2004 (Basel II) and then overhauled in the aftermath of the financial crisis in 2010 (Basel III). While such rules set a minimum required capital level for banks, countries retain leeway in calculating the ratio by which that level is achieved — allowing for tinkering in the numerator (definition of capital) and the denominator (risk-weighted assets).

"The adoption of Basel principles by the majority of countries around the globe is an important fact; however, what is more important is how countries are actually implementing those principles in practice," writes Fed Economist Gazi Ishak Kara. "The Basel principles for bank regulation are rich and complex in nature, which gives countries a substantial amount of leeway in their implementation." Read more

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