The Basel Committee on Tuesday finalized changes to the way risk-based capital standards must adjust to increasing credit risk prior to default on non-performing exposures (NPEs).  Covering on- and off-balance sheet exposures and going beyond loans to the full array of assets, the new approach adds more discipline than the U.S. has generally adopted and undermines the value of third-party guarantors and collateral when good NPEs go bad.  For good measure, it could prove very procyclical.

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