The most momentous agreement of recent times in international financial circles has been the G-10 Agreement on Capital Adequacy. This agreement has corollaries in US regulation, Japanese regulation and in the EEC directives on banking, but capital adequacy for banks' investment activity is different than its trading activity or the trading activity conducted by securitized firms. In general, financial assets that can be pooled are more fungible, and obligations undertaken in the securities business are far more short-term, requiring less long-term capital. The worldwide tendency toward securities markets and away from traditional lending, and the securitization of asset pools, has become possible because of the growth of institutional investors such as money market and pension funds. The G- 10 Agreement on capital adequacy, because it achieved agreement only on bank capital, inevitably lags today's international capital markets.
The debate of the 1970s and 1980s over monetary policy has been replaced by one in which capital adequacy is at the fore. The impending failure of European Monetary Union may impact on the single market program for financial services. Certainly, it will slow down the pace, but the principal changes which must proceed in banking and securities regulation and consolidated supervision are unrelated to monetary union.
Capital adequacy definitions and their impact depends on the treatment of reserves and other local accounting standards, the distinction between securities and banking activities, and the facility of national markets to create hybrid instruments which qualify as capital. In the United States, FDICIA has created rigorous definitions of capital for US banks. By contrast, the Japanese are less fervid in their regulation of bank capital; and bank supervision is inherently different in "capital market" countries, such as the United States and the United Kingdom, from such supervision in production exporting countries, such as Japan and Germany. Japan and