Letter to the editor of Risk : a response to Cosandey and Wolf’s Avoiding pro-cyclicality

Much has been written on the proposed changes to the Basel Accord (Basel II), and we have been surprised that the vast majority of both academic and practitioner literature focuses on the prescriptive regulatory approaches and formulas to calculate minimum capital requirements under Pillar I.

In our opinion, it is actually the introduction of Pillars II and III that will have a greater impact – Pillars II and III will fundamentally change the role of regulators and financial disclosure, and thus determine most of the practical consequences of Basel II. Therefore, to fully understand these consequences, one must address both the drivers of minimum capital requirements (as determined by Pillar I), and the way in which financial institutions will manage their capitalisation and

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