COMMERCIAL BANKS AND NEW CAPITAL REGULATION
Simardeep Sran - 211689444
Due: September 12, 2013
Table of Contents
1. Introduction 4
2. Findings 5
3.1. Move from Basel II to Basel III 5
3.2.1. The Global Financial Crisis and Basel II Shortcomings 5
3.2. Basel III 6
3.3.2. Main Features 6
3.3.3. Basel II and Basel III Difference 8
3.3. Implications of Basel III 9
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Secondly, the main features of Basel III are outlined and discussed in depth along with how the new features heavily contrast with the previous Basel II. Finally, the report critically evaluates the implications of the global banking system, namely the banking systems in Australia and Japan, and the reactions in the financial arena towards the implementation of Basel III.
The sections below illustrate a researched discussion in regards to various topics on commercial banks and new capital regulations.
3.1. Move from Basel II to Basel III
It is common knowledge that the interconnectedness of global financial system carries immense systematic risk that can hinder economic and financial welfare of a global citizen, regardless of its demographic location. Since banks ‘…provide the oil that lubricates the wheels of commerce…’, it is imperative that they have sufficient resources to withstand economic downturns (Lall 2009, p.3). This may be the underlying reason why the Basel Committee on Banking Supervision regulates commercial banks of the world and treat them on consolidated basis (Viney and Phillips 2012). Additionally, the committee has proposed new capital adequacy standard, namely Basel III, to compensate for the shortcomings of Basel II. The following are the two interrelated factors that may have led the committee to consider a move from Basel II to Basel III.
3.2.1. The Global Financial Crisis and Basel II Shortcomings
It can be argued that the global financial crisis (GFC) shook the foundation that the global economy was built upon. APRA (2012, p.3) indicated that the primary reason behind the cause of GFC was disproportionate amount of leverage and ‘…gradual erosion of level and quality of capital base…’ that the banking sectors had accumulated. During the onset of GFC, the holdings of the banks were insufficient to cover their losses leaving some of them insolvent. Despite the popular belief, APRA (2012) explicitly claims that ‘Australia was not immune from these impacts’. It is in fact true that Australian banks didn’t take on the similar banking activities on a big scale that the US banks undertook, the point still remains that the global economy is interconnected and the lack of consistency, resilience and transparency in international banking system can cause more cataclysmic crisis’ (Edey 2011). This may be why the APRA, in compliance with Basel Committee on Banking Supervision has considered a move to Basel III with an attempt to minimise or eliminate the impact financial crisis’ having on banks.
Despite its full introduction in 2008, Basell II has been guiding investment decisions amongst international banks since its publication in 2004 (Lall 2009). Lall (2009) claims that regulatory framework of Basel II was the core cause of GFC and thus, Basel II was the catalyst that allowed the banks to take on excessive leverage. According to Lall (2009, p.7), the quantitative Impact...