It defined a system of weighting assets by credit and market risk to avoid penalizing banks for holding low-risk assets. By 1998, many banks in Latin America and the Caribbean had capital-asset ratios well above the 8 percent Basel standard. Argentina supplements its capital-asset ratio requirement with a liquidity ratio of 20 percent, because its currency board arrangement places strict limits on the central bank's ability to act as a lender of last resort. Most countries weight assets for credit risk, as recommended in the original 1988 Basel accord, but fewer also weight assets for market risk. Tightening provisioning requirements on nonperforming loans is essential to ensuring that banks remain liquid during economic downturns.
Normal loans are in the first category.
In many cases, this framework allows for significantly lower provisions on secured loans or different provisioning levels for certain types of loans, such as consumer loans. Excessive concentration of risk contributed to many of the banking difficulties of the past two decades. As a result, countries such as El Salvador, Guatemala, Mexico, Peru, and the members of the Eastern Caribbean Central Bank tightened limits on loans to single borrowers or related parties to a specified share of bank capital. Net foreign exchange exposure is also limited in most countries. However, there are typically no limits on the concentration of lending in specific sectors of the economy.