August 1999 — A year after Russia’s default and the near-collapse of hedge fund Long-Term Capital Management, the Basel Committee on Banking Supervision unveiled proposals for revising global capital rules to strengthen bank balance sheets. “Excessive risk-taking and leverage on the part of hedge funds and Wall Street firms, aided by bank loans, pointed to a potential time bomb ticking in the banking system,” we noted in “Disarming Bank Credit Risk,” a phrase that would not seem out of place today. The proposals for what would become the Basel II capital accord were expected to encourage the use of derivatives as risk-management tools, further blur the line between commercial and investment banks and give a greater role to credit rating agencies in determining balance-sheet risk. Almost nine years later, with many analysts blaming those developments for contributing to today’s financial crisis, regulators are taking a fresh look at revising capital rules (see page 96).
