Rufus Folorunso Akinyooye - St Clements University

The committee states that this ratio is expressed as a common minimum standard, which
international Banks in member countries must have observed by the end of 1992. As could be
seen here emphasis is on international banks in G10 member countries or at best OECD. The
rest of this document from Items 45 to 50 was devoted to transitional and implementing
arrangements.
David Clementi (2000) said, “We should of course be under no illusion that the ratios chosen in
1988 were arrived (at) through a scientific process”. To buttress his point he cited an episode
where a Committee member once asked his staff on why the number 3 was chosen for the
calculation of a ratio. He said they answered that two was too low and four too high.
He also did not mince words in saying that the Basel 1 Accord was “aimed principally at
internationally active G10 banks” and that it was designed to spread the risk and penalty of
failure between shareholders and regulatory authorities that could be forced to become lenders
of last resort or liquidators. He said that apart from equity capital acting as buffer against
insolvency, it helps to align the objectives on the firm’s owners with the objectives of the
regulatory authorities. Where the owners of a bank invest pinpoint capital and watch their
bank gradually becoming insolvent through the erosion of capital, they usually come to have
an incentive to “gamble for resurrection” by taking higher risks. He concluded that once their
investment becomes high too, they would have much to lose in the event of a failure. As a
matter of fact they would lose everything especially where the deposits were insured. Milne
and Whalley (1998) argued along the same vein but against regulatory minimum capital
requirement, which they said, once it has fallen below the required minimum could increase
the owners’ appetite for high risks for the sake of survival. Should the high risks fail then the
moral hazard of transferring as much as possible of the banks resources into the hands of the
shareholders (looting) would come in. Either way the shareholders lose because as what
Arturo Estrella et al (1999) called Charter value (an intangible value that disappears with the
closure of the institution) would have disappeared. According to them, the charter value of the
bank produces a strong incentive to the owners of the bank to manage as a going concern. As
long as it remains a going concern owners could always benefit by either selling their
shareholding or watching it appreciate. It would thus be in their interest to keep the bank
afloat and that would also be in the interest of the regulatory authorities that would no longer
have to worry much on a bank failure that could upset the financial applecart. The Basel 1
Accord was in effect a subtle method of getting banks in G10 countries especially the
internationally active ones to be more risk-averse so as not to threaten the economy of their
home countries and by extension those of the entire Group.
Compliance in Nigeria
Most banks in the world including Nigeria embraced this particular provision of capital for
risk-weighted assets and it seems to have become the standard except that CBN stopped short
of requiring banks to actually charge it to their operating profit.
Its circular BSD/11/2003 of August 4, 2003 (effective January 2004) re-calibrated the capital
adequacy measurement of the Basel 1 Accord in an apparent effort to make it fit into the
Nigerian setting as follows:-
RISK WEIGHTS ON-BALANCE SHEET ASSETS
0% Placement with Discount houses secured with Treasury Bills.