One of the most important policy issues for financial authorities is to decide at what level average capital charges should be set. The decision may alternatively be expressed as the choice of an appropriate survival probability for representative banks over a horizon such as a year, often termed a “solvency standard”. This article sheds light on the solvency standards implied by current and possible future G10 bank regulation and on the “economic solvency standard” that banks choose themselves by their own capital setting decisions. In particular, we employ a credit risk model to show that the survival probability implied by the 1988 Basel Accord is between 99.0% and 99.9%. We then demonstrate that if a new Basel Accord were calibrated to such a standard, it would not represent a binding constraint on banks' current operations since most banks employ a solvency standard higher than 99.9%. To show this, we employ a statistical analysis of bank ratings adjusted for the impact of official or other support as well as credit risk model calculations. Lastly, we advance a possible explanation for the conservative capital choices made by banks by showing that swap volumes are highly correlated with credit quality for given bank size. This suggests that banks' access to important credit markets like the swaps markets may provide a significant discipline in the choice of solvency standard.

This paper assesses the cross country `stylised facts' on empirical measures of the losses incurred during periods of banking crises. We first consider the direct resolution costs to the government and then the broader costs to the welfare of the economy – proxied by losses in GDP. We find that the cumulative output losses incurred during crisis periods are large, roughly 15–20%, on average, of annual GDP. In contrast to previous research, we also find that output losses incurred during crises in developed countries are as high, or higher, on average, than those in emerging-market economies. Moreover, output losses during crisis periods in developed countries also appear to be significantly larger – 10–15% – than in neighbouring countries that did not at the time experience severe banking problems. In emerging-market economies, by contrast, banking crises appear to be costly only when accompanied by a currency crisis. These results seem robust to allowing for macroeconomic conditions at the outset of crisis – in particular low and declining output growth – that have also contributed to future output losses during crises episodes.