Basel III what and why?

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    Introduction

                         This article was published in 2016, written by Jonas Niemeyer. In titled with Basel II what and why? The writer of this article is exerting to explain and address the issues like what the Basel Committee is, the background to standard, what these standard mean, what are the differences between old and new regulations, what should be remain constant and why these are important for Sweden and Swedish Banks.

Purpose of the Article:

                        Authors in this article sates about that the Basel Committee is a committee of Central Bank and Supervisory authorities from different countries to promote global financial stability by improving and harmonizing both bank and the supervision of the banks. Its main objective is also to promote banks' sound risk management practice. The Basel Committee was set up in 1974 to improve global financial stability by creating a forum for cooperative between countries on banking supervisory issues. The central bank governors in the G10 countries decided at the end of 1974 to create a committee that would later be called the Basel Committee

                     In this article there are much new ideas about the consequences, In 1980s, the Latin America overcame financial crisis and then Basel committee realized that the focus on supervisory is not sufficient for controlling further crisis situation. Therefore, the committee decided to introduce Capital Adequacy Ratio at least 8% of total capital. Similarly, the committee had also stipulated the risk exposers of lending (Loan & Advances) where, 100% of corporate lending, 50% of mortgage lending, 20% of interbank lending and 0% of certain government securities. Under that agreement, the members (countries) had to implement the new capital requirement rules by the end of December 1992.

Research Methodology:

                                     This article was fully based on the first-hand Data which shows about 30 banks of the world, was designated as the global systematically important banks (G-SIBs) that must have applied a regulation of additional capital buffer of between 1-2.5% of risk weighted assets where the capital buffer must have included CET 1 capital. Similarly, the Basel III introduced the two liquidity requirements for managing liquidity crisis which are; (i) Liquidity Coverage Ratio for short term need and (ii) Net Standing Fund Ratio for long term need. The Basel committee introduced a leverage ratio as a standard capital requirement of 3% but G-SIBs should have maintained at higher level. The bank should have enough capital to cover total assets of bank's balance sheet and some off-balance sheet items. Later on, the Basel III introduced a harmonized regulatory framework for large exposer to individual counterparties where the bank is not allowed to have exposer that exceeds 25% of Tier 1 capital.

My Opinion:

                                    After reading this article, the findings are neutral to the readers i.e. neither much important nor less important. Reader gets the neutral view point in this article. Basel II had more focused on the risk weighted capital requirement but the Basel III has focused on the counter cycle buffer, leverage ratio, liquidity coverage ratio and net stable funding ratio where the Basel III regulations are more clear and stricter. Talking about Swedish Banks, although the Swedish economy is small in portion of rest of the world but there were greater impacts in global crisis of 2007-2011. There were some critical reasons behind it;

(i)                 high dependency on foreign sources of funds

(ii)              large amount of total assets (400% of Swedish GDP)

(iii)            market is highly concentrated so there is large exposure to one another

(iv)             market participants, banks and investors perceive that Swedish banks have implicit public-sector guarantee.

Eventually, as the recommendations, the Basel committee should comply the risk weighted capital at least 12%, liquidity coverage ratio not only in total but separately USD & EUR, and leverage ratio at least 5% so that the Global Financial system will encounter the future financial crisis in better way.