This article features the major economic powerhouses such as the US, European Union and Japans and
their failure to fully
implement bank-capital rules drawn up to prevent a repeat of the financial crisis in 2008, that followed the 2008 collapse of Lehman Brothers Holdings Inc. Preliminary assessments of the EU, the U.S. and Japan have identified areas of divergence with the Basel accord, the group said. There are key areas where domestic implementation may be weaker than the globally-agreed standards. There has been a deadline set by the Basel committee for nations to implement the rules before January 2013 stating more than triple the core capital that lenders must have to avoid insolvency EU and U.S. regulators have said that they will be vigilant in policing how each party applies the Basel III standards, which are scheduled to take full effect in 2019. Regulators announced last year that the group would organize a peer review team It was announced by this peer review team that the EU text is criticized as being less precise than Basel 3 in defining what kinds of securities can count towards core capital The Basel committees decision to review proposed liquidity rules for lenders shows that taking a bit of time to get things right is better than rushing Sharon Bowles, chairwoman of the European Parliaments economic and monetary affairs committee said The U.S. plans to ban banks from relying on assessments by credit-ratings companies to calculate their capital requirements may also impede compliance with Basel III. For the U.S. Potential concerns include that the nations regulators may apply the rules to too few banks. Thus, ending up with inconsistencies throughout the nation.
Issues flagged for Japan include that the nation has yet to publish rules, which are scheduled to be applied from 2016 requiring banks to build up capital buffers during credit booms. So what is a credit bloom? A credit boom or "lending spree" is the rapid expansion of lending by financial institution Flexible implementation of previous rounds of Basel rules in the EU has allowed European lenders to hold less capital against some assets than their U.S. counterparts. Initial examinations have shown that there is substantial unexplained variation in how banks carry out this so-called risk weighting on securities they intend to trade Functions of capital 1. To absorb unanticipated losses with enough margin to inspire confidence and enable the FI to continue as a going concern. 2. To protect uninsured depositors in the event of insolvency and liquidation. Capital protects non-equity liability holders against losses. 3. To protect FI insurance funds and the tax-payers. An FI's capital offers protection to insurance funds and ultimately the taxpayers who bear 4. To protect the industry against increases in insurance premiums. By holding capital and reducing the risk insolvency, an FI protects its industry from larger insurance premiums. 5. To fund new assets and business expansion. FIs have a choice, subject to regulatory constraints, between debt and equity to finance new projects and business expansion.
Basel 2 Pillar 1 covers regulatory minimum capital requirements for credit, market, and operational risk Credit risk risk that the borrower will not meet commitments when due. Market risk includes general market risk, changes in the overall market for interest rates, equities, foreign exchange and commodities, and specific market risk, risk that the value of a security will change due to issuer specific factors, e.g. credit worthiness of issuer. Operational risk - risk of loss from inadequate or failed internal processes, people and systems or from external events. Such as internal/external fraud, employment practices and workplace safety, damage to physical assets, business disruption and system failure. Pillar 1 of the new capital framework revises the 1988 Accords guidelines by aligning the minimum capital requirements more closely to each bank's actual risk of economic loss. Pillar 2 - Supervisors will evaluate the activities and risk profiles of individual banks to determine whether those organisations should hold higher levels of capital than the minimum requirements in Pillar 1 would specify and to see whether there is any need for remedial actions. Pillar 3 -leverages the ability of market discipline to motivate prudent management by enhancing the degree of transparency in banks public reporting to shareholders and customers.
US Capital Regulation U.S. banks are required to comply with two sets of capital regulation: 1. The capital/asset (leverage) ratio: place banks into one of the five categories 2. The risk-based capital requirements: comply with the Basel I regulation (only a few largest commercial banks are strictly required to follow Basel II)
Basel 3 What is it? Twenty-seven countries are negotiating new banking regulations that would limit the risk at the worlds largest financial companies. The rules are expected to insist that banks hold higher levels of capital to protect against future losses Why? Regulators are trying to create a more resilient banking system to prevent against future financial crises Whats the impact? Overly restrictive rules could make it more expensive for people to borrow money, This is potentially crimping economic growth. Regulators counter that new rules will make the banking system safer and help restore confidence in financial markets
Significant Changes from Basel II to Basel III Common equity has to be at least 4.5% of total Risk Weighted Assets, after deduction This is raised from 2% in Basel II Tier 1 Capital has to be at least 6% of total Risk Weighted Assets The minimum Total Capital ratio is still 8% SIFIs must have higher loss absorbency capacity than other FIs to reflect the greater risk they expose to the financial system Additional common equity Tier 1 capital requirement of 1% -2.5%. Link 1 One of the reasons why they were criticised was due to the 2008 financial crisis which was detrimental to the economy, hence they want to avoid a reoccurrence of such an event. The Basel ii accord was insufficient in minimizing the impact of such a collapse, consequently Basel 3 was required, yet the economic powerhouse still failed to fully implement Basel 3. Hence leading to them being criticized, as they can influence the rest of the worlds nations Link 2 In the midst of the sub-prime mortgage crisis and following the collapse of Lehman brothers, regulators increased their capital requirement. Link to the previous paragraph Initial examinations have shown that there is substantial unexplained variation in how banks carry out this so-called risk weighting on securities they intend to trade, the group said today. The objective of the accord is to ensure that financial institutions have enough capital on account to meet obligations and absorb any unexpected losses Having said that flexible implementation of previous rounds of Basel rules in the EU has allowed European lenders to hold less capital against some assets than their U.S. counterparts. But then without consistent calculation of the risk weighted asset between banks/countries, it can be manipulated and calculated differently due to the loose rules set. Subsequently when banks disclose their total capial ratio it may not reflect their actual ability to absorb losses.