Basel Iii

1: Relationship between the capital base of banks and the 2007-1010 financial crisis and great recession. Previous financial crisis have demonstrated that past efforts to prevent systematic crashes are insufficient, and are still working to implement The Basel III framework. The Basel Committee on Banking Supervision tried to concentrate on solving some of the major systematic problems known during the financial crisis, however Basel III might fail to reduce the risks, some major countries could choose to reject the proposals or delay the implementation of this framework. One of the main problems is that Basel III is focusing mostly in Europe and the United States, ignoring the practices in emerging economies. This new regulation will only shift systematic risk from one place to another without really reducing the risk of global financial crises placing greater regulation on banks and allowing non bank institutions to operate without supervision, meaning that this will increase rather than decrease systematic risk. 2: What measures should limit counterparty credit risk? Counterparty credit risk is the risk that the opposing party in a financial transaction will fail to honor an agreement. Since Basel II did not required banks to hold enough money in order to honor the agreement, Basel II is imposing additional measures to calculate the amount of risk. Some of the measures to limit counterparty credit risk are to include a period of economic and market stress when making assumptions, this way banks will be required to hold more capital in order to honor the agreement. Also, it has been proposed that banks increase the correlation assumptions between financial firms assets, this will increase the risk adjusted weighting for banks funding from other financial institutions, and by doing this financial institutions will decrease the dependence on one another. 3: Discuss the use of liquidity ratios as a valid focus for international regulations. The liquidity framework aims to improve banks flexibility to liquidity problems in the market; however it will harm international practices. The liquidity framework will increase the cost and decrease the availability of credit, meaning that banks would not have sufficient funds to conform to the minimum regulatory NSFR. It could also create liquid asset shortages or a large concentration of risk since all banks will want to hold similar assets, so banks will not be able to rely on lines of credit, liquidity facilities or other type of funding. This could negatively affect the international bank lending market, which is a major source of funding for many banks.