What Does a Community Banker Need to Know about the New Basel Accord?
In the U.S., the new Accord will likely apply only to the largest international banks. However, the risk-management concepts, principles, and applications found in the new Accord will ultimately change the basic nature of all banking and have a decisive impact on future capital levels in all banks as well as on the cost of capital. Allocation of capital to specific lines of business will become more risk-sensitive rather than standardized to whole classes of assets. As many community banks assess their overall financial performance on a ROA/ROE basis, the new Accord also will measure performance by allocating bank capital against specific assets or business activities. The banks call this approach RAROC, or risk-adjusted return on capital. Basel now sets the stage for allowing differing levels of capital based on differing levels of risk in each individual bank and will potentially create a competitive advantage for some banks. The good news is that banks get to decide, with their regu
