The evolution of capital adequacy rules – the contrasting cases of Sweden and Britain

ABSTRACT The regulation of bank capital has evolved from minimum capital requirements for joint-stock banks to elaborate risk-based capital adequacy rules. How did these regulations come about? How and why have they changed over time in different coutnries? Sweden began to regulate minimum capital in the nineteenth century. In 1911 an early version of capital adequacy was introduced. In addition to stringent regulation a separate inspection agency was given wide-ranging powers to ensure compliance. Britain also had minimum capital rules in place but during the twentieth century these two countries followed different paths in regulation and supervision of capital rules. This paper examines the Swedish case in detail and contrasts that with the British case. It is suggested that their respective civil and common law traditions may explain the divergent approaches to defining and regulating capital adequacy.