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The effect of the Basle Accord on the risk-behavior of banks was examined. The Accord was signed in July 1988 by industrial countries which were members of the Basle Committee on Banking Supervision. Two main issues were studied. The first was the empirical verification of an interest rate risk (IRR) subsidy and second was the changes in risk-taking behavior due to risk adjustments resulting from the Basle capital regulations. It was discovered that the majority of large US banks did not take advantage of the IRR subsidy. Those who did have high levels of IRR risk substituted this risk with credit risk.

A case involving the interaction of a new loan decision and bail-out loan of a bank to a sovereign borrower experiencing debt servicing problems and the bank's capital is examined. Sovereign debt is different from private debt in that creditor cannot sue a debtor in court or gain control of the debtor's assets. The loan was granted with stipulations that prospects for repayment be increased and that the bank should have sufficient capital. It was concluded that there is positive correlation between capital and the bail-out loan and the new loan and the current debt., 1. Introduction In recent years, bankers and regulators have focused increasingly on banks' capital and its adequacy, the role of capital is to absorb unexpected losses resulting from the exposure [...]

This article presents information related to the effects of government economic activities on the pricing of capital assets and capital structure of the firm. The mean-variance Capital Asset Pricing Model (CAPM), considers only the private sector of the economy, and is based on a number of explicit or implicit assumptions. One of these assumptions, which is related to the fact that the government sector does not enter into the analysis, is that there are no taxes, either corporate or personal. The effects of taxation on the value of the firm and financial equilibrium, have in common a major shortcoming which is that the treatment of the government economic role is incomplete. Tax is a cost incurred by firms and individuals which fail to consider the effects of the expenditure side of the government budget. The government budget as a whole, taxes on the one side and expenditure on the other, will affect the individuals' wealth directly and indirectly through the effect on the general price level. Unlike the original CAPM where the single source of risk was the market variability, two additional sources of risk are introduced--uncertainty about interest rates and transfer payments.