ed, banks take on less risk; (2) It ensures that banks who take on higher levels of risk must have a higher proportion of their own capital in reserve; (3) Since it is difficult to establish whether higher ratios really represent a risky portfolio, banks will cooperate. However, the establishment of these ratios has caused problems for banks and regulators. Banks are required to both define and measure capital and income. Since income is turned into capital on the balance sheet, there has been much emphasis placed on the measurement of income by the regulators. Another issue which needs attention is who should measure capital and income. Is internal auditing sufficient or is there a need for an independent, external auditor. The most vital issue, however is on which country’s accounting standards should the ratios be based on. Stewart illustrates this in his article using the US and UK Generally Accepted Accounting Practices to calculate different figures for capital and income. This emphasises the need, expressed earlier, for harmonisation at an EU level. What about non banking financial firms? It is needed here to assess the level of risk taken on between companies. In general, it is not possible to quantify and correlate financial risk across all firms operating in the industry. So this means that systematic risk of failure in non-bank firms is much lower than in banking. Benston argues strongly against regulation in financial markets, concentrating heavily on statutory disclosure of information of firms quoted on the US exchanges."The weight of the arguments and data strongly supports the conclusion that the costs of government-required disclosure exceed any possible benefits" (Benston, 1985. He asserts that the pre 1997 UK way of self regulation is superior to the strict rules of the SEC in the US. The question of whether interventionist statutory legislation is useful is being constantly discussed. Perhaps the UK have got it...
