BASEL 3

Basel 3 will be implemented by next year is a Successor of Basel 1 and Basel 2 Norms for Banking regulation.


Basel III" is a comprehensive set of reform measures, developed by the Basel Committee (Bank for International standards) on Banking Supervision, to strengthen the regulation, supervision and risk management of the banking sector.


 These measures aim to:

1.    improve the banking sector's ability to absorb shocks arising from financial and economic stress, whatever the source

2.    improve risk management and governance

3.    strengthen banks' transparency and disclosures.

4.    Reduce high Leveraging of the Financial institution.

5.    Increase the Tier 1 Bank Capital ratio.

The Basel agreement is the cornerstone of efforts by BIS following the 2007-2009 financial crisis to make sure the global banking system is more robust.

JPMorgan's announcement last month that a hedging strategy had gone crooked, producing at least $2 billion in unexpected trading losses, has been pointed to as a reminder of the need for substantial capital cushions.

The new capital standards would force banks to rely more on equity than debt to fund themselves, so that they are able to better withstand significant losses.

The banking industry has complained that the rules could limit their ability to lend, since that would require most banks to hold more cash relative to their total assets.

So, the idea is to have bigger buffers against losses, and to make it harder for financial institutions to fail, bringing down the world's financial system.

The accord, which is to be phased in from 2013 through 2019, will require banks to maintain top-quality capital equivalent to 7 percent of their risk-bearing assets, about three times what they are required to hold under existing rules

It is up to each country to write rules to implement the Basel agreement for its banks.

This provision would hit the largest international financial institutions in US such as JPMorgan Chase & Co, Goldman Sachs Group Inc.. 

PROS:

1.    Ensuring that all banks have a minimum amount of capital, equal and transparent between countries.

2.    Financial stability in the world.

3.    Recession free world.

CONS:

1.    While the intention to strengthen capital and liquidity buffers for the banking system is appropriate, the implementation of such metrics and their combined effects on the economy at large bear close scrutiny and further analysis. In fact, one concern that seems to go unnoticed is the cumulative effect of regulation on amplifying procyclical outcomes to the loss of consumers, investors and ultimately taxpayers.

2.    Banks holding cash as a buffer would make it harder for them to lend

3.    Will reduce the GDP of the country by minor basis points.

4.    While full implementation of the standards is years away, the study estimated that banks would need to raise an additional $500 billion in capital to comply with the requirements.

5.    Bank’s returns to fall by more than 3% under the new Basel III regulations or about one quarter of what their returns are currently. 

Most of the Banks in different countries already met Tier 1 capital requirements like Australia :
They are on an accelerated timetable compared to most other global banks, who will have until 2015 and also most Islamic Banks : Already exceeded the requirement.
The worst hit Banks in the world who could fail to meet :
European banks like Spanish, Italy Banks.

Recent News: Recently US federal reserve approved most of the Basel 3 norms, now even small Banks too in US need to soon follow Basel 3

Tagged as:BASEL, BASEL 1, BASEL 2, BASEL 3, BANK LAW, BIS, US BANK