What is the net contribution of the Basel Process to the governance of global finance? The goal of this paper is to describe, analyze, and evaluate the costs and benefits of the Basel Capital Adequacy Accords through the comparison of intended consequences, namely the stability of the global banking system, and unintended consequences, namely financial risks.
“Basel Process” refers to the governing attempts of the Bank for International Settlements (BIS) in the global financial system, as well as the collective efforts that finance ministries, central banks, and regulators of different countries made towards the common goal of achieving global financial stability. The term is also used to refer to the policy-making process through which
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At the time, international Capital flows were increasingly disorderly, due to being often unregulated. Helleiner (2014) argues that the Basel Committee on Banking Supervision (BCBS) created the 1988 Basel Accord to establish “a common minimum capital adequacy standard for international for the first time” (p. 94). It reflected the increasingly market-friendly thinking present at the time. The 2004 Basel Accord later reinforced this “self-regulatory” approach by allowing large banks to “rely more on their own data and internal models in determining the amount of capital to put aside for overall credit risk.” In 2010, the G20 countries created Basel III to increase the quantity and quality of capital required for banks and help buffer banks from times to times of market …show more content…
Not all negotiations or discussions involved every nation affected by the newly proposed regulations. After regulations were passed through the Basel Process, they were up to each national regulator to apply with their own adjustments. This, understandably, led to the misapplications, with or without intention, in different markets.
On the one hand, the Basel Accords have contributed greatly to the stability of the international banking system, with remarkable results. On the other hand, unfortunately, though predictably, they have also given different actors in the financing market the incentive and means to evade regulations. These behaviors have led to a new set of financial risks in the markets.
Global Financial
The presence of systemic risk in the current United States financial system is undeniable. Systemic risks exist when the failure of one firm may topple others and destabilize the entire financial system. The firm is then "too big to fail," or perhaps more precisely, "too interconnected to fail.” The Federal Stability Oversight Council is charged with identifying systemic risks and gaps in regulation, making recommendations to regulators to address threats to financial stability, and promoting market discipline by eliminating the expectation that the US federal government will come to the assistance of firms in financial distress. Systemic risks can come through multiple forms, including counterparty risk on other financial ...
After the LDC (Less Developed country) crisis, Canadian banks suffered greatly and the nation faced the worse decline since the Great Depression. A Commission of Enquiry was created to investigate bank failures and regulation changes were recommended. This was when OSFI (Office of the Superintendent of Financial Institutions) was created because Canada realized that they should move past self-regulation. In addition, FISC (Financial Institutions Supervisory Committee) was also established to have greater oversight of the system. U.S. on the other side felt that they had a good recovery from the LDC crisis through restructuring of balance sheets and debts. Although they have agreed to international regulatory standards (Basel accords) with more sophisticated risk measurements, leading up to the 2008 financial crisis the U.S. was still financing mortgage and other debt with securitized instruments, which was a threat that regulators should have considered but he profit and incentives high enough to make market participants look the other way when it comes to proper lending practices and risk evaluation. Canadian banks and regulators were more conservative and limited the amount of positions they took in derivative markets. While Americans leaned toward short-term profits with little adjustment for risk, the Canadian struck a better balance
Major banks are cutting back on some of their legally permitted operations, such as- market making, and that has led to liquidity issues in the bond markets. Proprietary trading could become unregulated if more banking activities continue moving towards the shadow banking system. This would essentially defeat one of the main purposes of Volcker Rule. [d] The third major unintended consequence has been the degree by which the Federal Reserve has become the main regulator of the finance industry. In order to discourage future bailouts similar to the ones during the financial crisis, the Dodd-Frank Act limited the Fed’s emergency powers. However the liquidity and capital standards now imposed by Fed has purportedly become one of the most important regulatory developments of the Dodd-Frank Act.
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:
There is a vast amount of literature available on the additional procyclicality of regulatory capital charges in Pillar 1 of Basel II. In this section, we shall briefly visit this literature and see if any conclusions can be drawn from this, before proceeding to the conclusion and mitigation of these procyclical effects. The majority of the literature, as expected, focuses primarily on the IRB approach, as this aspect of Basel II has drawn the most criticism from financial practitioners and academics alike. The greater part of this literature has found that there is an overwhelmingly substantial rise in procyclicality of minimum regulatory capital charges originating from the IRB approach. Gordy and Howells found that under the IRB approach, volatility in the capital charge, relative to the mean, is between 0.1 to 0.26 (Gordy & Howells, 2004). This follows another study by Kashyap and Stein, which shows that capital charges rose by 70-90% during the years of 1998 to 2002 dependant of the model used to calculate PD’s (Goodhart & Taylor, 2004).
Eichengreen, Barry. Globalizing Capital: A History of the International Monetary System. Princeton, NJ: Princeton University Press, 1996.
After doing research in groups and alone and collecting information the Basel system is very helpful in stabilizing the financial position it has helped Australia a great deal it achieving milestone and becoming the 4th largest fund management industry.(lateral economic, 2007) and also discuses the ways other countries may use it too, as it explains the pros and cons of both the Basel and the AFS.
Under global background, capital flows are frequent and capital cost always is relatively low in developed countries, so lots of banks in undeveloped countries seek capital support from developed countries. For example, in 2016, China’s Postal Savings Bank raised $7bn from global market and the majority capitals come from developed market, because the bank has taken large capital for promoting international expansion and has been accepted by foreign investors. With international expansion, China’s Postal Savings Bank can make a great success of foreign financing, so the bank can obtain cheap capital for supporting business development. One main motivation for international expansion is regulatory avoidance and banks hope to avoid the strict domestic regulation for developing in foreign countries. Houston et al (2012) argue that the regulatory difference, especially the requirement of capital reserve, largely promotes the international development of commercial banks, to avoid the high capital adequacy
Basel (1999) Intra-Group Transactions and Exposures Principles, The Joint Forum: Committee on Banking Supervision, International Organization of Securities Commissions, International Association of Insurance Supervisions, Basel Committee Publications.
Liikanen, E. (2013). The economic crisis and the evolving role of central banks. BIS. Retrieved from http://www.bis.org/review/r131128c.htm.
8. Krueger, Anne. (June3 2004). Promoting International Financial Stability: the IMF at 60. Retrieved April 12, 2008 from,
Furthermore, the ‘openness’ and ‘interconnectedness’ of markets due to globalization increases the vulnerability of countries to externalities, particularly international economic conditions like financial crises. Before the dominant presence of globalization, financial crises in any one particular country posed little risk to those of others, according to Forbes. Unfortunately, due to international markets that lend and trade resulting from globalization, this is no longer the case. The health of a country’s financial system is now very much dependent on the health of another countries’ banking systems and vice versa.
Many researchers have pointed out that the global imbalances are the root of the recent financial crisis. Portes claims that “the underlying problem in international finance over the past decade has been global imbalances, not greed, poor incentive structures, or weak financial regulation, however egregious and important these may be.” (2). According to him, the global imbalances lead to “the increasing in dispersion of current account”, which “puts a burden on financial systems to intermediate.”
To understand the role financial institutions play in the global economy it is important to first understand the nature of the globa...
The theory of financial liberalization is greatly explained by the works of MacKinnon (1973) and Shaw (1973). Financial liberalization refers to the removal of government ceilings on interest rates and of other controls on financial intermediaries. It is concerned with macroeconomic aggregates (interest rates, savings and investment) and conditions in formal financial markets (Baden, 1996). It refers to the removal of all constraints in the financial sector. In contrast, financial repression refers to distortions of financial prices such as interest rates. Financial liberalization as used here refers to the deliberate and systematic removal of regulatory controls, structures, and operational guidelines that may be considered