<p>I found two of two papers discussing this period, the second at length.</p>

<blockquote>
  <p>Throughout the 1970s, the capital position of many banking
  institutions declined significantly. To address this decline, in
  December 1981, the bank regulators issued explicit minimum capital
  standards for banks and bank holding companies. These standards
  required banks to hold capital at least equal in amount to a fixed
  percentage of their assets. While these standards have been given
  credit for increasing bank capital ratios, the 1980s saw an increase
  in both the number and cost of bank failures. A weakness of the
  minimum capital standards is that they failed to take into account the
  risk in a bank's portfolio of assets; high-risk assets required the
  same amount of capital as low-risk assets.</p>
</blockquote>

<p><a href="http://garrido.pe/lecturasydocumentos/JAQUES%20y%20NIGRO%20(1994)%20riskbased%20capital,%20portfolio%20risk%20and%20bank%20capital.pdf">Risk-based capital, portfolio risk, and bank capital: A simultaneous equations approach by K Jacques and P Nigro (1997)</a></p>

<blockquote>
  <p>In 1972 the Fed capital standard was revised again. Asset risk was
  separated into “credit risk” and “market risk” components. In
  addition, banks were required to maintain a higher capital ratio to
  meet the test of capital sufficiency. Further, the Fed reintroduced
  both the capital to total asset and capital to total deposit ratios.
  This time, however, the former ratio was based on total assets less
  cash plus U.S. government securities, a rough “risk asset” adjustment.
  In practice, bankers and analysts used the FDIC and Fed standards more
  than those of the OCC.</p>
  
  <p>None of the agencies established a firm minimum capital ratio.
  Instead, the capital positions of banking institutions were evaluated
  on an individual bank basis. Particular attention was directed toward
  smaller banks whose loan portfolios were not as diversified and whose
  shareholders were fewer in number than those of larger institutions.
  It was reasoned that small or “community banks” might have a hard time
  raising capital in times of difficulty and therefore should be more
  highly capitalized at the start than larger institutions. Table 1
  shows the banking industry’s capital-asset ratios from 1960 to 1980.
  The table shows that there was a steady downward drift in the ratio,
  which can be explained by a number of factors. Chief among these would
  be the attractiveness of increased leverage in banking and reliance on
  other techniques to manage balance sheets, e.g., liability management.</p>
  
  <p>In late 1981 the three Federal bank regulatory agencies announced a
  new coordinated policy related to bank capital. The policy established
  a new definition of bank capital and set guidelines to be used in
  evaluating capital adequacy. The new definition of bank capital
  included two components: primary and secondary capital.</p>
  
  <p>Primary capital consisted of common stock, perpetual preferred stock,
  surplus, undivided profits, mandatory convertible instruments (debt
  that must be convertible into stock or repaid with proceeds from the
  sale of equity), reserves for loan losses, and other capital reserves.
  These items were treated as permanent forms of capital because they
  were not subject to redemption or retirement. Secondary capital
  consisted of nonpermanent forms of equity such as limited-life or
  redeemable preferred stock and bank subordinated debt. These items
  were deemed nonpermanent since they were subject to redemption or
  retirement.</p>
  
  <p>In addition to the new definition of capital, the agencies also set a
  minimum acceptable level for primary capital and established three
  zones for classifying institutions according to the adequacy of their
  total capital.</p>
</blockquote>

<p><a href="http://www.rich.frb.org/publications/research/economic_review/1988/pdf/er740603.pdf">International risk-based capital standard: History and explanation by MC Alfriend (1988)</a></p>

<p>In the United States it isn't just Basel that is changing. FDICIA act of 1991 is also an important regulatory change for regulatory capital standards. My understanding is that Basel I only worried about credit risk but FDICIA introduced capital requirements for interest rate risk as well, perhaps in response to the contemporaneous savings and loan crisis where many thrifts failed as a result of losses from interest rate exposures. </p>

CC BY-SA 3.0
2014-12-17T14:00:25.657Z
2014-12-17T14:00:25.657Z
BKay
<p>Does anyone know of any work on banking system behaviour, and in particular the governing regulatory frameworks that applied between the 1973 collapse of the gold standard based Bretton Woods system and the introduction of the Basel Accords and capital regulation beginning in 1988?</p>

CC BY-SA 3.0
2014-11-25T07:19:17.087Z
Sorry you were down voted there for a second - my thumb slipped.
jayk
<macroeconomics><regulation><banking>
Banking Regulatory Frameworks, between the 1973 collapse of Bretton Woods and the introduction of the Basel Accords in 1988?
Lumi
# Banking Regulatory Frameworks, between the 1973 collapse of Bretton Woods and the introduction of the Basel Accords in 1988?

(Asked by: username_0 on 2014-11-24)

Does anyone know of any work on banking system behaviour, and in particular the governing regulatory frameworks that applied between the 1973 collapse of the gold standard based Bretton Woods system and the introduction of the Basel Accords and capital regulation beginning in 1988?

**Tags:** macroeconomics, regulation, banking
> **Comments:**
> **username_1**: Sorry you were down voted there for a second - my thumb slipped.  

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## 1 answers

### Answer by username_2 on 2014-12-17. Score: 6

I found two of two papers discussing this period, the second at length.

> Throughout the 1970s, the capital position of many banking
> institutions declined significantly. To address this decline, in
> December 1981, the bank regulators issued explicit minimum capital
> standards for banks and bank holding companies. These standards
> required banks to hold capital at least equal in amount to a fixed
> percentage of their assets. While these standards have been given
> credit for increasing bank capital ratios, the 1980s saw an increase
> in both the number and cost of bank failures. A weakness of the
> minimum capital standards is that they failed to take into account the
> risk in a bank's portfolio of assets; high-risk assets required the
> same amount of capital as low-risk assets.

[Risk-based capital, portfolio risk, and bank capital: A simultaneous equations approach by K Jacques and P Nigro (1997)](http://garrido.pe/lecturasydocumentos/JAQUES%20y%20NIGRO%20(1994)%20riskbased%20capital,%20portfolio%20risk%20and%20bank%20capital.pdf)

> In 1972 the Fed capital standard was revised again. Asset risk was
> separated into “credit risk” and “market risk” components. In
> addition, banks were required to maintain a higher capital ratio to
> meet the test of capital sufficiency. Further, the Fed reintroduced
> both the capital to total asset and capital to total deposit ratios.
> This time, however, the former ratio was based on total assets less
> cash plus U.S. government securities, a rough “risk asset” adjustment.
> In practice, bankers and analysts used the FDIC and Fed standards more
> than those of the OCC.
>
> None of the agencies established a firm minimum capital ratio.
> Instead, the capital positions of banking institutions were evaluated
> on an individual bank basis. Particular attention was directed toward
> smaller banks whose loan portfolios were not as diversified and whose
> shareholders were fewer in number than those of larger institutions.
> It was reasoned that small or “community banks” might have a hard time
> raising capital in times of difficulty and therefore should be more
> highly capitalized at the start than larger institutions. Table 1
> shows the banking industry’s capital-asset ratios from 1960 to 1980.
> The table shows that there was a steady downward drift in the ratio,
> which can be explained by a number of factors. Chief among these would
> be the attractiveness of increased leverage in banking and reliance on
> other techniques to manage balance sheets, e.g., liability management.
>
> In late 1981 the three Federal bank regulatory agencies announced a
> new coordinated policy related to bank capital. The policy established
> a new definition of bank capital and set guidelines to be used in
> evaluating capital adequacy. The new definition of bank capital
> included two components: primary and secondary capital.
>
> Primary capital consisted of common stock, perpetual preferred stock,
> surplus, undivided profits, mandatory convertible instruments (debt
> that must be convertible into stock or repaid with proceeds from the
> sale of equity), reserves for loan losses, and other capital reserves.
> These items were treated as permanent forms of capital because they
> were not subject to redemption or retirement. Secondary capital
> consisted of nonpermanent forms of equity such as limited-life or
> redeemable preferred stock and bank subordinated debt. These items
> were deemed nonpermanent since they were subject to redemption or
> retirement.
>
> In addition to the new definition of capital, the agencies also set a
> minimum acceptable level for primary capital and established three
> zones for classifying institutions according to the adequacy of their
> total capital.

[International risk-based capital standard: History and explanation by MC Alfriend (1988)](http://www.rich.frb.org/publications/research/economic_review/1988/pdf/er740603.pdf)

In the United States it isn't just Basel that is changing. FDICIA act of 1991 is also an important regulatory change for regulatory capital standards. My understanding is that Basel I only worried about credit risk but FDICIA introduced capital requirements for interest rate risk as well, perhaps in response to the contemporaneous savings and loan crisis where many thrifts failed as a result of losses from interest rate exposures.


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