Global Banking Regulation Basel III, its economic impact on Global banking and financial industry. Reservations of Global banking and financial sector are discussed.

1. Summary of the Research paper
Basel III: Is the cure worse than the disease?
Authors: Bill Allen and Ka Kei Chan
Sami-Ud-Din
PhD Scholar (Islamic Banking & Finance)
School of Economics, IIIE, Islamic University Islamabad
Registration# 16-SE/PhD IBF/F19
+923335952403
sami.uddin@riphah.edu.pk
Shah Nawaz
PhD Scholar (Islamic Banking & Finance

2. Main Theme of the Paper
▪ Economic Impact of the Basel III Reforms to Banking Regulations
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3. Assertions of the author
1. Long term economic impact of Basel III will be much less than
the fear already spread in the financial industry on the condition
if the consequent changes to business models, processes,
governance are carefully managed for avoiding any shortage of
financial funding.
2. The introduction of reform will limit the availability of credit
and will reduce the economic activities in the financial industry.
Assertion 2 of the author seems for
short term impact
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According to the author coordinated
adaptation of the rules is a major
problem.

4. Specific problem attached to
implementation of the Basel III
reforms
▪ According to the author coordinated adaptation of the rules is
a major problem. If this problem was not properly
addressed then it will cause threat to starve the
economy of credit.
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Higher capital & Liquidity requirements are not the problems

5. Temporary Problem attached to
the Basel III reform
▪ According to the author the Basel III reforms will cause some
constrains about the balance sheet as expected
BALANCES SHEET WILL SQUEEZE VERY BADLY BY the INTRODUCTION OF BASEL III
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6. Solution to the Implementation of Basel III Reforms
▪ Regulators and the concerned authorities should use the
long period of Basel III implementation for:
▪ Engaging both banks and investors in a constructive
discourse for the required operational and business models’
changes.
Otherwise the cure (reform of Basel III) will indeed turn out to have
been worse than the disease (current economic crisis)
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7. Adverse Economic impact of Basel III Reforms
▪ If sufficient guidance and proper time framework is not
provided to financial industry then it is confirmed that the
improper and inefficient reform will aggravate the present
economic crisis. Like:
It will limit the availability of credit and
will reduce the economic activity.
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Otherwise the cure (reform of Basel III) will indeed turn out to have been worse than the disease (current economic crisis)

8. Economic impact of the increasing
of the capital requirement ratio
▪ Higher the capital requirement ratio of Basel III will lower the
cost of borrowing to borrowers (Banks and financial
Institutions).
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9. Changes required in financial
Industry for a true implementation
▪ Coordinated changes are required in the business models,
business processes and governance to implement Basel III in
its true sense cannot be taken for granted.
Cannot be ignored and under estimated
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10. Changes and Reforms of Basel III
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11. 1- The foremost reform
▪ Basel III will bring an end to the asset-driven liability
management (ALM) in which banks compete aggressively for
market share in lending markets on the assumption that they
will always find the necessary wholesale funding on the basis
the large assets they have.
Wholesale funding = receiving deposits from outside sources like fellow institutions or Govt.
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12. 2- Revising the Internal process of
assessment and Business decisions
1. Assessment for the approval of customer loans
2. Effective communication of bank business models
and business opportunities to investment community
(individuals and institutional investors)
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13. 3- Expose of risky credits
& liquidity risks
▪Mechanism for the exposure of risky credits and
proper management of liquidity risks should be
placed on the balance sheets of banks or
through some other measures of non- Bank
lending.
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14. 4- Issuance of Long Term debts
▪ A proper mechanism will be adopted to issue long term debts
will minimum credit risks.
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15. 5- Banks are required
to raise the level of equity funding
▪ According to the reforms banks are suggested to raise their
levels of equity funding rather to invest in govt; securities that
is benefit the wholesale and retail investors.
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16. 6- Assets vs. Liabilities ratio
▪ Banks are needed to increase the liquidity of their assets and
reduce the liquidity of their liabilities ultimately till the end of
2018 as dateline given by the Basel Committee.
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17. Adjustment of the Customer
Funding Gap (CFG)
▪ Long-term funding and stable deposits are to be raised by
the end of 2012. The ratio or gap between the two should not
be risky-nature for the financial industry as a whole.
Funding gap means the difference between customers loans and deposits
CFG= Deposits/Loans
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18. Enhancement of the common
equity
▪ Common equity of the banks will be required to enhance up
to the minimum requirement 4.5% as set by Tier1 capital of
Basel III.
Tier 1 capital is used to describe the capital adequacy of a bank and refers to core capital that includes equity capital and disclosed reserves.
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19. Trade off between the cost of
credit and the safety of financial
system
▪ According to the author the cost of credit can only be lowered
if financial system is completely regulated and made safe
from any crisis. The Basel III reforms ensure the stability and
safety of the financial system.
▪ Risky financial industry demands for higher cost of credits.
Therefore banks first be financially stable and safe by
regulating it in the main stream regulations of Basel III.
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20. Capital and liquidity requirements
vs. economic crises
▪ According to the author, higher capital and liquidity
requirements will surely reduce the frequent economic crises
and loss of output of the financial industry.
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21. Basel III regulation mitigates the
Systemic Risk
▪Basel III by investigating its incentives and its ability to
reduce obvious drawbacks of Basel II as well as
systemic risk factors. It enabled to raise like:
1. Risk-weighted leverage ratio (RWLR)
2. Net Stable Funding ratio (NSFR)
RWLR= Regulatory Capital/Risk-Weighted Asset
NSFR= Available Stable Funding/Stable Funding Required ≥100%
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22. Basel III impact on the customers’
borrowing
▪ Basel III could result in lower, not higher, costs of borrowing
for bank customers.
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23. Adverse impact of raise in capital
and Liquid asset on the output
▪ 1 % increase in capital requirements reducing potential
output by only 0.08 percent.
▪ a 1 % increase in liquid asset ratio reducing potential output
by 0.03 percent
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24. Reservations and responses of the
Global banks
▪ Several UK banks expressed their reservations to the
implementation of the Basel III reforms as under:
1. They simply cannot raise the long-term debt level
2. Cannot simply raise equity funding
3. The balance sheets of the banks will be forced into a
massive contraction.
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25. Major Financial Issues that are still
to be addressed
▪ Procyclicality of the present global financial system is the
major problem. The Basel III cannot present effective solution
to this problem.
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