LAUSR

Purpose This paper aims to propose the directions for potential reforms for the capital regulation. The focus is on the simplicity and comparability of the regulation, in addition to its risk sensitivity. Design/methodology/approach The author reviews the development of the Basel standards and identify the existing issues. On this basis, the recommendations are suggested. Findings The paper found that the capital regulation has become so complexed that it undermines its own efficiency in promoting the safety and soundness of the banking system. In addition, the current framework prevents a comparison of capital ratios across countries and over time. This discourages the market participants to supervise the bank’s operations. Therefore, there are still a need for the capital regulation reform. Practical implications By making the regulation simpler while ensuring the credit sensitivity, the market participants can play the most of their role and support the regulators in supervising banks. Originality/value The directions for the revised framework would be useful for the Basel Committee and central bank governors in designing an effective mechanism to supervise and discipline banks.