The new Basel II Capital Accord has been one of the financial sector’s most
fiercely discussed topics in the recent past. After many years’ debate, the
regulations formally took effect on January 1, 2007, and the advanced measurement
approaches are scheduled to become fully operational on January 1, 2008. The new
regulations will cause a number of changes in the area of credit risk. The calculation
of risk-weighted assets, and thus of regulatory capital, will henceforth be based
on borrowers’ credit ratings to a much greater extent than according to the
old regulations (Basel I). The concept of capital (i.e. the definition of own funds)
itself will remain largely unchanged, although it was subject to repeated changes
in recent decades. This paper examines the definition of capital in the new Austrian
Banking Act and shows that the capital concept will need to be modified in the future.
In addition, it defines regulatory capital in relation to other capital concepts,
revealing inter alia that capital has a broader definition than balance sheet equity.
An analysis of the capital adequacy of Austrian credit institutions demonstrates
that their capital ratio clearly exceeds minimum capital requirements and that the
composition of banks’ capital shows a favorably high share of core capital.