Author: Arturo Estrella

Bank supervisors have made significant strides since 1980 in the area of capital requirements, and they are currently pursuing further refinements. This article looks beyond such developments at longer term supervisory goals. Abstracting to some extent from the current regulatory framework, the author attempts to delineate a set of fundamental principles for future work on capital requirements. He distinguishes minimum capital—an objective standard imposed by regulators across firms—from optimum capital—a subjective standard adopted by individual firms to cover their own risks—and shows how the two concepts can form the basis for a general supervisory approach to capital.