Commercial Banks And New Capital Regulations
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Genre: Finance

What are the main factorsthat have led the regulators to consider a move from Basel II to theBasel III?
What are the main features of the Basel III and how do they differ from Basel II?
What are the implications for the banks as a result of this new regulation?

About the Book

Commercial Banks And New Capital Regulations

Introduction

Commercial Banks play the most important role in a financial system. They are critical for the growth of the economy as they support the financial infrastructure in the business. It provides the much needed impetus to the business in the form of borrowings for both setting up the business infrastructure as well as the working capital requirements. Because of the critical role played by the banks, it becomes imperative for the financial regulators to supervise the banking sector. The financial regulators use various prudential standards to closely monitor the commercial banks. Out of the various prudential standards deployed by the regulators, one critical aspect is to meet the capital standards (BCBS, 2008).

On a global platform, the Bank of International Settlement (BIS) has set up various committees to monitor the banks and their functioning. The Basel Committee on Banking Supervision came up with certain regulatory capital standards for the banks so as to maintain a prudent and healthy financial system. The standards were globally accepted and came to be known as Basel I Accord and were introduced by BIS in 1988. Subsequent to many years of study and observation of financial crisis in various parts of the globe, the Basel II Accords were introduced and implemented by most of the countries by 2008.

The coming of 2008 saw a new dent in the global financial system. Many of the big giants in the banking sector across the globe had faltered; some economies have collapsed leading to a global financial crisis. Although the severity of the crisis is over, the after-effects are still felt in the global financial system. The key areas susceptible to problems are to be looked at and stringer norms are to be envisaged so that any future event can be prevented and Basel III norms came into being (BCBS, 2010d).

Factors Leading from basel I to basel III

  1. After-effects of banking crisis

History shows that the severe economic crises are related to banking crises. There is precedence that distress in banking sector has led to the major economic crises. A study in 2010 by the Basel Committee on Banking Supervision on the long-term economic impact shows that due to the problems faced in the financial industry, the outcome declines by around three-fifths of the previous output (BCBS, 2010a). Distress in the banks is the most destructive and the reason behind that are the high leverage and the cross-linkages of the banks with the other institutions in the financial system. Because of the significant reliance upon banks for the flow of funds, other industries are highly dependent upon banks. Besides, the other sectors of the economy are totally dependent upon banks for lending funds so as to run the businesses. Any liquidity mismatch in the flow of funds by the banks leads to inability to service the maturity deposits and hence leads to loss of customer confidence. In the very recent part of the global crisis, it has been seen that the destabilized banking risk is passed on to the sovereigns (BCBS, 2010b). The governments have to come out with major bail-out packages for the banks to be able to survive and float. This results into increased debt borrowings for the governments and hence the sovereigns become highly leveraged. Therefore, it is critical that the banking norms are revisited and made stringer so that the effects of a financial crisis are undermined in the future.

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