The proposed additional capital requirements for the management of banks' interest rate risk

Abstract

The 1970s was a boom period for banking in general, but also a time when financial markets became more competitive. This led to growing concern about risk management in the banking sector and about banking supervision in particular. The 1980s was, among other things, characterized by further dynamic changes to the financial system. The increase of international intermediation caused substantial balance sheet growth of banks in the industrialized countries. For example, the oil-producing countries began to increase their investment in the industrialized countries, whose banks then channelled the money to the developing countries. New, 'exotic' financial instruments were also introduced at an accelerated rate. One consequence of these developments was to increase the risks associated with banking activity (Llewellyn, 1988, p. 9). Although risks are inherent to banking, internationally there was growing concern about the increased level of these risks, especially the inadequate capital provisioning of banks. The purpose of bank capital is to absorb losses that could result from risky activities.