ABSTRACT
As a group, banks perform a function of singular political importance in that they determine the amount of money circulating through the economy. This is why they operate under the strict supervision of a public authority which, in many countries, is the national reserve bank. As individual enterprises, banks carry on the business of distributors, that is, wholesalers and retailers of funds: they borrow funds to lend them out for a profit margin on interest. To protect their creditors, banks are generally required by law to maintain a level of own means relative to their lendings which their supervisory authorities consider an adequate insurance against some of their debtors defaulting. By this legal constraint a bank’s lending volume is effectively limited to a certain multiple of its equity. Differences in capital charges create competitive inequalities especially for internationally active banks. From the outset, a priority objective of the Basel Committee was to redress these inequalities by harmonising the standards of capital adequacy to be observed by banks across the jurisdiction of its member countries.
