Analysis Of Basel III

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Following the financial crisis of 2008 – 2009, the Basel Committee of Banking Supervision (BCBS) extensively revised the existing capital adequacy guidelines. The resultant capital adequacy framework is called Basel III. In a paper published by KPMG entitled Basel III: Issues and Implications Basel III proposal had two main objectives:

• To strengthen global capital and liquidity regulations with the goal of promoting a more resilient banking sector
• To improve the banking sector’s ability to absorb shocks arising from financial and economic stress, which, in turn, would reduce the risk of a spillover from the financial sector into the real economy.
The KPMG article further argues that the Basel Three proposals are split into three main parts to represent the main areas of focus (pillars). These are capital reform, liquidity reform and other elements relating to general improvements to the stability of the financial system. The area focusing on capital reforms includes quantity and quality of capital, complete risk coverage, leverage ratio and the inception of both capital conservation and a countercyclical buffer.
Liquidity reforms encompass both short-term and capital ratios while other elements relate to systemic risk and interconnectedness. Under this pillar issues of concern include capital incentives for using CCPs for OTC, higher capital for systemic derivatives and inter-financial exposures. Contingent capital and capital surcharge for systemic banks also form part of this pillar.

Addressing the Ninth High level Meeting for the Middle East and North Africa region jointly organized by the Basel Committee on Banking Supervision, the Financial Stability Institute and the Arab Monetary Fund (AMF) in Abu Dhabi, United Emira...

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...rms, which effectively required fire-sales of assets, exacerbated the fall.”
Schwarcz (2010) makes an important point which warrants further discussion. He notes that although governments have attempted to introduce measures aimed at dealing with systemic risk the focus has tended to be on institutions and not markets. This is also supported by Schwerter (2011) who argues that regarding systemic risk, the Committee on Basel III did not provide adequate coverage on systemic risk regulation. He argues that the Basel III proposals have one major flaw, that is, the non-existent pricing of systemic risk. He notes that the “committee’s proposal for systemically important banks to implement loss absorbing capacity beyond the standard through a combination of capital surcharges, contingent capital and bail in debt, this absolutely mandatory obligation is not treated. The

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