Banking Aspect Basel-III’s Advantages A Retrospective StudyBa.docx

Banking Aspect Basel-III’s Advantages: A Retrospective Study
Banking Aspect Basel-III’s Advantages: A Retrospective Study
By: (Name)
(Professor)
(Institution)
25th November, 2012
Abstract
Basel I and Basel II had been developed earlier and were less
stringent. The need for Basel III has come at the appropriate
time. Since Basel II has failed to be effective, the new
regulatory framework has shown that it can adequately
sustained the vibrancy of banking industry in time of financial
and economic crises. From financial perspective, Basel III has
facilitated the sustenance of tangible capital specifications
across all financial systems. Due to such measures the dynamics
of supervisory requirements including capital adequacy have
been harmonized in all banking agencies. Also the scope of
evaluation capabilities within individual banks is as well
explicitly refined within the dynamics of Basel III
specifications.
Basel I accord restricted the innovative aspects which
concerned supervisory responsibilities, and this dragged the
implementation of various capital markets service applications
(Roberts 1999). On the other hand, Base II was highly sensitive
to risks than were in Basel I. It was also declared inadequate
due to the emergence of reputation risks, strategic risks as well
as systematic risks. Basel III’s importance became a reality
because it incorporated more risk-evasive techniques and it was
risk-proof.
Contents
61.INTRODUCTION

61.1.Basel III Accord
71.2.Problem statement
81.3.Background to the research
91.4.Research Approach
101.5.Research Objectives
111.6.Research Aims:
121.7.Research Questions
132.Literature Review
132.1.UK Banking Environment
142.1.1.Retail Banking
152.2.Corporate Banking
162.3.Over the Counter derivatives
162.4.Cash Trading
172.5.Securitizations
172.6.Basel II
192.7.Problems with Basel II
212.8.Failure
232.9.The need for introduction of better banking standards
overlooked by Basel II
242.10.Key factors of consideration in the implementation of
regulatory framework
252.11.Need of the Basel-III Accord
262.12.Integrating of Basel III and Basel II
282.13.How will Basel III affect banks?
302.14.Why Basel III
312.15.Basel III Advantages
322.16.Basel III and Financial Stability
342.17.Benefits of stringent regulation
342.18.The new requirement for liquidity and capital conversion
buffer
373.Research Methodology
373.1.Primary sources
373.2.Secondary Sources
383.3.The effects of Basel III regulations on the performance of
banks
393.4.The cost banks bear after the adopting Basel-III

424.Empirical Evidence
424.1.Earlier studies
444.2.Current Studies
454.3.Basel III Future
464.4.Essential Guidelines for successful implementation of
Basel III in banks
495.Conclusion
51References List
1. INTRODUCTION
1.1. Basel III Accord
Basel III or Basel 3 is a development released in December,
2010 in a sequence of three series of Basel Accords. Basically,
in the banking sector, there are risks and ventures that can
prove stringent on business operations. These accords are
applied when dealing with risk management factors in the
banking sector. The most recent development, known better as
Basel III is the global regulatory framework employed
worldwide. It was established by the Basel Committee members
for management of Banking Supervision and bank capital
adequacy, market liquidity risks, and stress testing.
Basel I and Basel II had been developed earlier and were less
stringent. The need for Basel III has come at the appropriate
time. Since Basel II has failed to be effective, the new
regulatory framework has shown that it can adequately
sustained the vibrancy of banking industry in time of financial
and economic crises. From financial perspective, Basel III has
facilitated the sustenance of tangible capital specifications
across all financial systems. Due to such measures the dynamics
of supervisory requirements including capital adequacy have
been harmonized in all banking agencies. Also the scope of
evaluation capabilities within individual banks is as well
explicitly refined within the dynamics of Basel III
specifications.
It is important to point out that due to emerging financial
threats, Basel II could not have managed to provide the much

needed solutions; hence the integration of regulatory
specifications has seen the banks statutory requirements being
implemented. With the implementation of Basel III banks can
now operate wit assurance that they have a secure buffer.
Examining the principles of Basel II, it can be argued that the
mechanism employed ignored various features which could have
made it more adequate. Since it tackled regulatory issues more
than operational aspects, it failed to support, and sustain the
banks during the crisis period. The need for Basel III after
Basel II failed was obvious.
With Basel III banks embraced new banking concepts which
involved capital ratios, risk management regulatory framework,
leverage ratios, as well as Liquidity Coverage Ratios among
others. These new changes were to be implemented through a
well integrated system, which would be of significance in the
way banks and other financial agencies handle internal and
external crises. Therefore, the need for Basel III requisites can
be classified as a noble step towards a strong banking industry
as well as secure global financial systems.
1.2. Problem statement
The recent economic crisis exposed a deep slit within monetary
institutions which requires to be sealed. Financial markets
underwent unprecedented losses as well as unforeseen changes
which evolved to be disastrous. These issues had a far-reaching
impact in regards to the existing structures associated with
financial systems. Despite the evolution of diverse financial
technologies, the financial markets were caught up in the
revolutionary wave of the web, which then caused massive
downfalls as well as the economic crunch across the globe
(Sveriges 2009). This is well illustrated by the recent financial
market crisis in Greece; US mortgage foreclosure crisis as well
as Portugal’s volatile financial markets.1.3. Background to the
research
Since the industry is tied to various institutional policies, the
important aspects would involve having leveled statues which

would make the industry more harmonized. In this respect it
would be instrumental to point out that the previous banking
accords helped in establishing strong banking foundations. One
of these pillars was Basel II accord which had numerous
advantages that included: transparent banking procedures,
reliable rating structures, dissemination of detailed banking
information, as well as the formulation and implementation of
unique external models of assessment of risks.
Through such configurations the bank industry enjoyed an
equitable monetary competition. However, as the banking
industry developed, so did the Basel II accord, whose
fundamental capabilities appeared to become weaker and
unstable with the evolution of new banking schemes. This was
exposed by countless real financial crises. Some of these crises
in regard to international banking standards touched on internal
rating procedures concerning risk appraisals which are
conversely complex and hard to implement in some regions.
Basel I accord restricted the innovative aspects which
concerned supervisory responsibilities, and this dragged the
implementation of various capital markets service applications
(Roberts 1999). On the other hand, Base II was highly sensitive
to risks than were in Basel I. It was also declared inadequate
due to the emergence of reputation risks, strategic risks as well
as systematic risks. Basel III’s importance became a reality
because it incorporated more risk-evasive techniques and it was
risk-proof. Basically, financial institutions, and in particular
banks, are not mandated to engage in transactions in which the
rate of the risks cannot be eliminated and controlled in a more
adequate and efficient manner. 1.4. Research Approach
Since the research topic and basis is on banking sector, the
discussion will, therefore, center on the need of the Basel-III
Accord alongside the collapse of Basel-II. Hence the research
done will cover the critical aspects regarding the new accord in
the situation when previous accord failed.
According to research, it was identified that the bank can handle

each type of identifiable risk and in a similar manner, check and
control/limit its consequences using Basel III. What this
demonstrates is that Basel III accord would assist in averting
financial instability that has over the years been forcing the
government to spend billions of taxpayer’s funds in an attempt
to safeguard the integrity of the banking system. Hence, this
accord has seen three areas associated with banking being
completely overhauled; these areas include liquidity, leverage
and regulatory capital.
It is evident that liquidity risk was highly neglected. The
evolution of the strong approach towards liquidity has seen the
emergence of new and reliable regulatory frameworks. The new
dispensation which is Basel III covers banking issues which go
beyond either asset phase of the balance sheet or the risks
surfacing as a result of interest rates. The other aspect which
the previous accords lacked concerns the regulatory effort. 1.5.
Research Objectives
Since this study attempts to explore and examine the benefits of
Basel III fundamental procedures as well as the demands of the
latest configuration of regulations, which are exceedingly
stronger and enduring, it becomes necessary:
· To examine the core dynamics associated with the significance
of implementing Basel III accord.
· Hence, identify the flaws which made Basel II a failure.
· To examine why banks are still holding onto Basel II despite
its failures
· Identify the modifications which were made to Basel II into
the currently running Basel III banking facet.
· To evaluate why financial institutions are holding into Basel II
despite its failures while raising the need to exploit Basel III
accord.
Basel III was found to be more resistant and equally flexible to
existing or emerging financial shocks (Nemiro 2004). The

identified Basel II shortcomings revolve within the broader
context of consistency, transparency as well as quality of the
banks capital base.
In regard to the Basel III mechanics, it is obvious that the
banking industry is being ushered into a new front where it must
implement strong measures which would withstand any kind or
form of crisis without seeking public support. Thus, the
regulatory framework on which Basel III is anchored would
help the banking institution to overcome a number of various
challenges associated with financial institutions (Parks 2009).
Financial establishments, capital markets as well as central
banks in their normal operations apply various mechanisms
intended to minimize exposure to the liquidation. This may
explain why Basel III accord is essential in overcoming risks
involved with banking as applied and tested using previous
Basel accords.
1.6. Research Aims:
Due to the aforementioned risks involved in the banking
industry, a solid and reliable financial system is indispensable.
Since these challenges could in future push the world finances
to the wall, it becomes paramount to identify measures that
would help to check and sustain lasting global monetary
regulations. These effects are more poignant in the banking
sector. As a result, the banking industry had to be reinforced
through the formulation and implementation of feasible and
comprehensive policies. The formulation of such policies would
ascertain the banking industry is shielded and established within
realistic tenets (Rogers 2001).
The primary aim of this research is to:
· Interrogate why banks along with other monetary
establishments require this latest structure when the presence of
Basel II is as well maintained.
Even though Basel II was not as effective as it was expected to
be, it provided a leeway in the manner various regulatory

frameworks were initiated. In this way the concept of IRB
(Internal-rating-based) capital requisites were formulated. This
provided a stable path by which Basel III accord was to be
initiated and implemented.
Due to such observations the banks as well other allied financial
institutions cannot operate or ignore the dynamics of Base II
accord. Examining the objective behind such issues it is
imperative to note that Basel III accord reinforced the positive
aspects allied to the previous accord. Hence, as demonstrated by
previous studies in regard to Basel II frameworks, it is accepted
that it fuelled the current financial revolution employed by
banks and other financial institutions.
The fundamental propositions behind the applied measures are
projected at:
· Reinforcing the resilience of the banking industry involved
with regulatory capital along with leverage;
· Reinforcing the global framework dealing with liquidity risk
measurement, evaluation standards, as well as handling liquidity
requirements.
· Exploring the dynamics on which both Basel I and II were
established
1.7. Research Questions
RQ1. Is Basel III accord fully adequate in dealing with the
mentioned risks involved in the banking sector?
RQ2. Did the upsurge of Basel III alleviate the needs for use of
Basel II or are they both mirror images of each other with minor
adjustments?2. Literature Review2.1. UK Banking Environment
The collapse of some of the leading global financial agencies
such as German Herstatt Bank as well as Franklin National
Bank in 1974 exposed that financial troubles were not just
confined in specific countries, they were global, and this
necessitated a coordinated integration of actions to cater for this
kind of crises in the future (Gold 2005). The sole objective was
to avert any form of financial crisis. Looking at the general

framework of Basel II accord it is evident that the configuration
of the associated standards failed and this demonstrates why it
failed to be a much anticipated solutions. However, the major
problem regards the manner the accord proposed and supported
banks to exploit their unique risk models to quantify minimum
capital levels.
What this shows is that the banks had an upper hand over the
regulators in as far the level of equity they wanted to hold was
concerned. Since the banks could not depart completely from
Basel II operational dynamics, it becomes instrumental for the
G20 to comprehensively endorse Basel III, which in essence
reflects an expressive departure from previous substances of
both Basel I and Basel II. Exploring the previous and current
banking regulatory frameworks, Basel III can be said to be
based on the philosophy of augmenting the quality as well as
quantity of capital that financial establishments ought to hold.
Equally, Basel III has extensively introduced a unique
macroprudential set of systematic measures to be employed
within the banking industry.
Though all previous changes regarding Basel I and Basel II
were conservatively developed within a macroprudential level
leveraged within bank specific prospect, Basel III pioneered the
implementation of standards which included countercyclical
buffer as well as universal leverage designed to tackle
systematic risk in relation to global financial configuration.
Hence, the guidelines that are essential to have a successful
implementation for Basel III for banks are correlated to banks
regulatory structures. The projected guidelines show that Basel
III ought to be established within radical modifications in
addition to move away from risk-weighted point of view.
The dynamics of such an undertaking is to have an effective
policy, where, all banking aspects would be judged against the
stability of quality, transparency as well as the consistency of
the regulatory capital foundation. In this case Basel III is
anticipated to ensure the capital base of any active bank is
reinforced by a strong and well anchored buffer that can

withstand shock in times of financial instability. Currently, the
UK banking environment can be said to have greatly improved
following the implementation of the Basel III accord.
2.1.1. Retail Banking
Looking at the existing aspects of Basel II and the latest Basel
III stipulations it would imperative to point out that retail
banking would be less affected by these regulations. And this
would mean they will be less flexible even in their response to
emerging banking possibilities, being rational to re-pricing, cost
cutting as well as other shifts within the banking industry. The
most influential and utmost changes, that influences the overall
bank, are such as liquidity specifications as well as higher
capital. Particularly new capital ratios which can be exceedingly
significant since many of the retail banks of late could as well
gain from decreased capital ratios than those of wholesale banks
(EBRD 2008). In this way, it is evident that an increase in
target ratios associated with high-risk units can likewise fuel an
increase in bank costs which can be up to seventy basis score.
Evaluating numerous consumer finance divisions re-pricing
could turn out to be challenging, thus, Basel III could thus
compel the banks to pass the increased costs to clients which
could not be easily realized.
2.2. Corporate Banking
This segment of banking would as well embrace partial
consequences, just as is with retail banking, largely due to
higher capital proportions. Numerous standard commercial
products, like asset based finance, long term corporate loans
business could as well be heavily affected, by facing increased
funding costs. Likewise, Basel III would cause an increased
liquidity specification which would in future result in an
increase in free credit as well as liquidity lines in regard to
financial organizations along with corporate establishments.
Considering the challenges of passing the cost increases to

customers, this could as well cause massive reduction in banks
profitability as well as reduction in capital allocated to these
establishments (EBRD 1999). On the other hand, Basel III could
ignite a change regarding bank/client relationship, as the active
portfolio administration will be more challenging due to the
novel limitations on hedging as well as with capital markets
dealings.
Nevertheless, investment banks along with their broad capital
market engagements would be greatly affected. The issues allied
to regulative interferences, in addition to new capital treatment,
limited netting, as well as new leverage ration, in addition to
new funding specifications for trading set, are likewise
anticipated to have a greater influence on trading activities. The
three major areas to be affected under Basel III regulatory
framework include:
2.3. Over the Counter derivatives
In this business caliber there exists two principal effects. One,
financial institutions and specifically banks are required to hold
additional capital associated with market risk. Secondly, newly
incorporated CVAs require banks hold extra capital for the sake
of counterparty credit risk. In this way, it is assumed that credit
valuation amendments tend to increase RWA by an approximate
factor of 3, including other modifications regarding market risk
adjustments. Along with liquidity requisites this may ignite an
increase of costs considerably by 86 basis points as reflected by
the market value un-netted together with uncollateralized status
on average (Enoch, et al 2007). Unlike in Basel II, where low-
rated counterparties stood, Basel III in this case would compel
financial organizations to be conscious to modifications. Thus,
banks would be mandated to seek news procedures to
recompense for increased costs, and more so, demanding
collateral as well as netting accords in addition to transferring
banking activities to fundamental counterparty clearing policies.
2.4. Cash Trading

Higher Inventory costs are projected to auger negatively on
profitability, specifically the funding requisites on lower rated
belongings. Hence, such an endeavor can cause broad widening
correlated to bid-ask spreads ranging from 1-10 basis score,
which is actually manipulated by increased hedge costs
imported from OTC derivatives, and the outcome would be
realized within the commercial activities leaning towards bank
exchanges.
2.5. Securitizations
Total reconstructions in this banking segment could definitely
cause an increase in capital ratios by a factor of 10. Foremost,
the financials, purchasing a piece of the latest securitization,
will be compelled to ascertain in the days to come, that the
pioneers maintain 5 % of each and every securitization
processed. Secondly, a threefold increase in regard to capital
requirements pertaining securitization could be witnessed.
Thirdly, in opposition to Basel II, which mandated to deduct
securitization with minimal rating, Basel III facilitated a 1.25 %
on those securitizations. Together with the augmented capital
ratio, this then amounts to a to a large extent higher capital
rations rating from 40% to 100% which is substantially greater
for capital deductions.
2.6. Basel II
Basel II is in essence a global business standard that compels
financial establishments such as banks to maintain adequate
capital reserves to cater for risks resulting from operations. The
Basel accords can be said to be a series of explicit
recommendations relating to banking laws and regulations
which are promulgated by Basel Committee on Banking
Supervision or BCBS (Humble 2004). In principal, Basel II is
an enhanced version of Basel I, it was first introduced in the
early 80s; this entailed providing sophisticated models for
quantifying regulatory capital (Honohan and Luc 2005). To all

intents and purposes, the accord consented that banks with
riskier assets ought to be having greater capital on hand than
those banks maintaining risk free portfolios. Similarly, Basel II
required all the banks to publish detailed report of their risky
ventures as well as their risk management activities. The
principal requirements of Basel II were three, and they entailed:
· Mandating that capital allotments by institutional executives
are more risk receptive.
· Sorting out credit risks away from operational risks in
addition to quantifying both.
· Cutting the extent or likelihood of regulatory arbitrage by
trying to line up the actual or financial risk specifically with
regulatory estimation.
Practically, Basel II evolved to be a novel revolution within the
banking industry, it resulted in the massive transformation of
numerous strategies which allowed banks to make or undertake
risky investments, for instance, the subprime finance market.
On the other hand higher risks assets were allowed to be moved
to free-for-all units of holding organizations. And this
demonstrated that the risk can be expressly moved to investors
through securitization, a process of acquiring non-liquid assets
and charging them into a secure security that can be transferred
and be traded within open markets. However, with Basel II
implementation it was found that banks average capital
specifications did not change with the projected industry status,
while individual financial institutions showed considerable
modifications (Hofstede 2001). The accord was expected to
facilitate the banks prime trade portfolio which was to be
exceedingly collateralized. However, this resulted in banking
with greater risk portfolio facing advanced capital requirements
and this turned out to be a negative consequence within the
banking industry since it curtailed the banks trading potential.
Even though Basel II was designed as a regulatory framework to

improve on banks capital adequacy configurations, its endorsers
had anticipated to foster a solid and reliable emphasis on
various elements of risk management; in addition to using it to
encourage financial institutions, to embrace the ongoing
enhancements within banks risk evaluation capabilities. This
may as well explain why Basel Committees refrained away from
the 1988 Capital Accords for the sake of implementing Basel II.
While Basel I was explicitly confined to the measures allied to
market risk in addition to being a determinant for credit risk,
Basel II ushered a novel array of advanced credit risk
procedures as well as a new concept regarding operational risk
(Hofstede G& Hofstede GJ 2005). The concept was tied to the
approach of integrating the banks internal risks along with their
preferences in handling them in relation to the level of
regulatory capital which they were to maintain. This thus
necessitated each bank to evaluate and place its operational risk
management within its operational agendas. As a result, Basel II
framework facilitated a continuum of applications ranging from
basic to sophisticated procedures of quantifying both
operational risk as well as credit risk in calculating capital
levels. In this way it provided a flexible framework in which
banks, subject to managerial evaluation, assumed procedures
which were in line with their degree of sophistication as well as
their risk profiles.
2.7. Problems with Basel II
Basel II was developed to guard investors from financial crises
which it never did. From a market point of view, Basel II was
projected to provide a safer and reliable banking environment
(Henry 1990). However, as testified by the recent financial
crises it miserably failed and this is as well acknowledged and
verified by Bank of International Settlement, in addition to its
Base II committee. Among the factors that fueled the financial
crisis is that Base II committee as well as financial
establishments underestimated the risks of losses on their
overall assets as well as their exposure to the systematic

breakdown of others. This necessitated only the utmost
threadbare of investment cushions for structured debt which
comprise of securitized finances, Basel II bank regulations
facilitated this obliviousness. This accord sustained measures
that allowed potential losses to exceed banks operating capitals,
and this compelled lenders to be tight with their funds. In this
manner only massive taxpayers could afford to intervene and
overt the imminent financial system breakdown. The reality is,
Basel II was not a definite solution to the emerging and existing
financial problems, and rather, it was an explicit cause of these
problems. Whiles formal completion was initiated recently,
Basel II has been exceedingly shaping numerous investment
resolutions since its enactment in 2004 in a manner that has
heavily sustained and promoted numerous hazardous lending
engagements evident at the heart of the financial crisis. This has
considerably evolved to be a shock given the fundamental
objective of the Basel Committee, particularly when it engaged
itself to develop reform capital initiatives in 1999. The sole aim
was to redesign an accord that could introduce improved safety
as well as reliability of global banking frameworks (Heidrun
2002). From financial perspective, the trouble with Basel II is
in nature regulatory in addition to government along with its
regulatory authorities. These units within the premise of Basel
II accord controlled interest levels, as well as permitting same
interests to reassign wealth to them at the cost of the banking
society. Large banking corporations, for instance,
systematically swayed results in Basel II regulatory procedures
to their advantages, more so, at the expense of their regional
and emerging competitors and, despite that, systematic financial
stability. Under this configuration, banks were principally
allowed to define explicit risk metrics as well as derivative
investments; this resulted in a growing restriction of the Basel
efficiency as a tool of assurance. Due to this engagement the
banks operated without having any oversight authority to define
the standards by which they could trade or examine their risk
assumptions and assertions. Even if Basel I could have provided

reliable foundations, Basel II is heavily tied to mathematical
approaches since it heavily relies on data which is also subject
to Garbage In, Garbage Out (GIGO) (Graves 2007). Basel II
also relied on two flawed conditions, demand and supply side.
These two conditions failed to link effectively with expanded
macroeconomic stability as well as the efficiency of existing
baking stipulations. And this was the beginning of the need to
establish a more reliable regulatory framework.
2.8. Failure
The mandate of BCBS was confined to dealing with regulatory
issues arising from increased internationalization of banking.
The committee thus established rules which were to be observed
by all financial establishments regionally and internationally.
This resulted in the 1988 treaty which set the minimum capital
prerequisites anchored on a ratio of capital in relation to risk
weighted assets (RWA) of roughly 8%. On the other hand assets
were also risk weighted in relation to the personality of the
borrower. For instance, government bonds had an explicit 0 per
cent risk weighting, as typical corporate loans enjoyed 100
percent risk weighting. This framework which was borrowed
from Basel I dealt mainly with credit risk. By the wake of
1990s, the accord had evolved to be ineffective since it had
become costly for financial establishments and ineffective to
financial regulators. However, numerous surveys conducted
have shown that Basel II had failed to deliver on its projected
objectives. One of these surveys carried out by US Federal
Deposit Insurance Corporation in 2003 noted that the standard
capital in many American banks implementing the advanced
procedures were falling by 19-30%, with some recording
reductions exceeding 40%. The days when the dynamics of
Basel II defined the regulatory frameworks within the banking
industry have gone. The failure to steer the banks towards a safe
trading, international regulatory investments have caused Basel
II to establish weak foundations which could not sustain
systematic market risks, issuer as well as specific risks.

Evaluating the credit risk management, Basel II failed to
provide a solid measures which could have been effectively
employed to appraise credit as well as operational risks which
could be based on the accessible actual data. Thus, lack of
stable regulatory parameters saw this accord becoming
ineffective globally. Since the implementation of Basel II,
majority of financial institutions have been compelled into
unprecedented recapitalizations, both by investors from private
sector as well as governments globally. And this forced the
banks managers to grossly underestimate the amount of capital
required by financial institutions to avert financial crises. As
observed by Basel Committee, Basel II regulatory structures had
failed to ensure banks are supported by adequate funds in
addition being not gambling with creditor’s finances. They too
observed that investments of debt funded assets could be
initiated within 2 % silvers of the banks common equity.
Likewise, other different capital which comprises of hybrid debt
could not be easily subject to absorb losses, they are definitely
opaque. Hence, instead of converting their hybrids into any
form of equity, the troubled banks were forced to discard their
assets at a loss, this pressured on liquidity as well as prices
affecting the general bank activities heavily. What this indicates
is that Base II as a regulatory framework had no sound measures
of cushioning the banking industry from existing or anticipated
financial shocks, hence, it become a failure rather than a long-
lasting solution.2.9. The need for introduction of better banking
standards overlooked by Basel II
With Basel II, banks lacked proper structures which could be
employed to absorb any imminent losses or ascertain that the
concerned financial institution enjoys solid parameters that
support high quality capital integration. The other element that
is associated with the inadequacy of Basel II accord pertains to
redefining capital. With Basel II accord banks didn’t exclude
assets or properties that did in any way represent capital as a
positive investment. And this explains why despite some

positive aspects associated with it, Basel II did not provide any
ground for solving the existing and emerging financial problems
which were correlated to computation of the capital ratio in
relation to risk weighted assets. Due the emerging challenges it
emerged that Base II accord did not identify risk weights as
being arbitrary while the entire banking industry enjoyed a
period of procyclicality without positive measures of solving
regulatory arbitrage issues. Since the banking industry was
immersed in unstable environment, Basel II accord which is a
set of refined capital adequacy measures for global financial
establishments was pioneered by a select committee of G-10
supervisors. Comparing the position of Basel II and Basel III; it
is open that Basel III has far more advanced frameworks
necessary in steadying the primary definition of banks' capital,
with a fundamental focus being on the scope of strengthening
and advocating transparency in the banking industry. Basel III
also injected additional specifications which banks are expected
to adhere to. These parameters are essential in assisting the
bank to amplify its capital ratios along with the current internal
modelling standards in establishing credit risk as well as market
risks. In this way financial establishments could benefit from a
comprehensive evaluation of the current approaches related to
conservatism among other essential financial parameters.
2.10. Key factors of consideration in the implementation of
regulatory framework
The recent financial crises witnessed within the banking
industry provided a substantial insight into the way Basel II had
failed to redeem the banking industry from the financial shock.
The previous regulatory frameworks which were designed along
the principals of Basel I and Basel II proved to be ineffective.
Due to such issues the key factors of consideration in the
implementation of Basel III regulatory framework must consist
of capital conservation buffer. This element requires financial
institutions to maintain an extra 2.5% of their overall capital in
the form of what is referred to as CET 1 or common equity tier

1. In this way Basel III would effectively steer CET 1 towards
the complete specifications underlined by RWA. On the other
hand the banks are expected under capital conservation buffer to
establish their buffer through enactment of reduction
discretionary distributions. These measures as established under
BCBS would exceedingly provide the necessary ground for
propagating reductions which would equally result in decreases
share buy backs, staff bonus payments as well as dividend
payments. Such factors if etched within Basel III would
encourage the involved regulators to make sure reductions
allied to discretionary distributions are effected as the buffer is
systematically re-established. Another key factor to consider
regards the introduction of leverage ratio. In principal, neither
Basel I nor Base II rejected the concept that capital
specifications ought to be systematically upheld purely on the
precepts of RWAs. To effectively implement Basel III
regulatory framework the banks must consider adaptation of
leverage ratio as a mechanism of ascertaining efficiency. Since
policy makers, investors as well as banks all depends on
strengths of capital ratios to evaluate the stability of financial
markets as well as formulating solutions to avert any anticipated
crises, it is thus paramount to assert that capital ratios plays a
central in as far the implementation of Basel III regulatory
framework is concerned. In this way unprecedented
consideration must be established in regard to risk management
specifications as well as the nature of implementing Basel III
regulatory framework (IMF 2009). The implementation of this
regulatory framework would facilitate the launching of new
capital, liquidity standards to steer regulations, risk
management as well as leverage within the financial industry.
Hence, these measures which are the key factors of
consideration are imperative in reinforcing the previous aspects
of Basel II. Also reliable qualitative procedures establishing
common equity capital, paid-in common shares as well as
retained revenues, all constitutes the core constituents of
implementing Basel III regulatory framework. Likewise,

enlarging the risk coverage of the capital structure is equally
important; this arrangement allows the implementation of the
said framework to include various incentives which are linked
to the reduction of systematic risks within all financial systems.
In regard to implementation of Basel accords, Basel II
demonstrated that implementation of Basel III must be
incorporated with other aspects of risk management associated
with Program Management Office. This assimilation would thus
allow the development of coordination measures comprising
Basel III framework initiatives. And this would highly help in
streaming the banking activities. Thus, these factors are
essential in implementing Basel III regulatory framework, and
they are indispensable.2.11. Need of the Basel-III Accord
Basel III was released in early December 2010, and is the 3rd in
a sequence of Basel Accords. The Basel accords were developed
to deal with the issues emanating from risk management
features associated with banking industry. In brief, Basel III is a
modern regulatory concept which has been accepted by all
members of the BCBS in relation to bank sufficiency, stress
testing, as well as market liquidity risk. Both Basel I and II
were previous standards of the same but were inadequately
stringent. Basel is an all inclusive set of dynamic restructuring
measures, developed by Basel Committee on Banking
Supervision, to reinforce the directives, supervision in addition
to risk management of the banking industry. In essence, Basel
III is a continuation of the previous versions to improve the
banking administrative structures under both Basel I and Basel
II. Hence, Basel III intends to make better the banking
capability to deal with economic and financial shock, enhance
risk management along with reinforcing the banks openness.
Due to the complexity and failure of Basel II, Basel III was
introduced with specific objectives being to enhance the
banking industry’s capability to sop up shocks emanating from
various forms of financial as well as economic stress. Also, the
other aim consisted measures designed to enhance risk

management along with banks internal and external governance.
And this as well covered the banks elements of disclosures
including operational transparency. The need for Basel III along
the collapse of Basel II is an act of improving the banks
capability to withstand instances of economic and financial
crises as the novel guidelines are quite stringent more than
either Basel I or Basel II for capital along with liquidity ratios
in the banking industry.2.12. Integrating of Basel III and Basel
II
A number of fundamental assumptions by various financial
institutions as well as capital market regulators were compactly
proved wrong in the course of 2008 economic crises. For
instance, the commercial engagement regarding subprime
lending which was founded on the postulation that housing
prices would stay afloat and continue rising. This statement as
well proved to be erroneous and it ignited a chain of activities
that rocked the entire global financial systems. Though there
were numerous incentives which endorsed risk taking, reliance
on credit taking, compensation of the executives based on
unqualified growth, transfer of risk via securitization, while
revenue and gains relatively than risk attuned profitably; and
these were some of the elements which promoted extreme risk
taking by financial institutions. Unprecedented losses by
leading banking organizations evolved to be a crisis of
confidence that pulled away liquidity from all established
financial structures. Due to these happenings it became obvious
that Basel II guidelines had profound weaknesses (Agar 1994).
Exposure to perilous assets in the form of derivatives, subprime
loans as well as securitization had lead to massive losses. Due
to low quality as well as low quantity of capital, the existing
Basel II framework could not have withstood such a pressure.
And this affected considerably the banks industry capability due
to its uncontrolled leverage. As a consequence, it becomes
prudent of the BCSB to craft measures which led to the
formulation of Basel III. Under Basel II banking organizations

had unrestricted regulation which permitted them to define their
own explicit metrics as well as capital investments and this
restraint the Basel effectiveness as a viable application. Since
the banks had no specific standard its thus feasible to integrate
diverse aspects of Basel III with Basel II so as to ascertain
banks are operating within a secure regulatory environment.
Monetary organizations found in emerging markets are also
becoming paramount to financial market investors. Due to the
previous various Basel II imperfections they were exposed to
weak financial institutions in the emerging markets through
Basel II dynamics of direct investments. Due to the capital
market securities, as well as carrying out mutual investments
along with derivatives transactions, the scope of guarding such
banking procedures is important. Hence Basel III is integrated
with Basel II to reinforce the mechanics of identifying as well
as monitoring the stability of financial activities. And this is
important in that it would help the investor or the concerned
banking organization to understand the extent of credit exposure
in addition to allowing them to gauge the economic risks in
various global circumstances. Under Basel III regulatory
framework, an important metric is given as that which
establishes how adequately a bank handles and oversees the
execution of financial directives. In this way the integration of
Basel III saw the financial institutions operating within the
realm of superior capital, which facilitated greater loss
absorbing capabilities. And this indicates financial agencies
would enjoy a period of stronger pillars which would withstand
periods of economic stress. Also, the integration of Basel III
has allowed banks to sustain a strong capital conservation
buffer which is a capital cushion to cater against financial
shocks. Other elements which have ascertained Basel III to be
effective in relation to Basel concerns formulation of
countercyclical buffer leverage ratio, as well as minimum
common equity in addition to Tier I capital specifications.
2.13. How will Basel III affect banks?

The Basel III regulatory framework is to be implemented as per
the directives issued by BCBS from now and then, and this will
be both challenging to regulatory agencies as well as the banks
as well. The reason this aspect will impact on banks is allied to
the fact that Basel III will influence the banks expansion of
their capital and this will equally have direct impact at their
Return on Equity and specifically the public owned banks. The
other significant influence of this Basel restructuring is the
element of increased capital specifications correlated to trading
book disclosures, the general positions maintained within a
short-term basis. Hence, the BC QIS (Quantitative Impact
Study) in addition to industry estimate indicates that risk
weighted possessions for numerous trading portfolios will
exceedingly increase under the new specifications.
Nevertheless, securitization disclosures have emerged as the
most heavily affected. This has compelled majority of
international banking agencies with substantial trading
portfolios to examine where there investment requisites are
exceedingly increasing and more so if their any need to curtail
capital requirements through either hedging or by unwinding
position. attached with the assessment of shifting capital
necessities are new Basel III leverage as well as liquidity
coverage principles, in addition to industry reorganizations of
OTC (over the counter) derivatives together with proprietary
commerce. What this demonstrates is that Basel III has forced
financial organizations to reexamine their commercial strategies
as well as to consider which trade practice to exit or to develop
due to the growing impact of Basel III along with the shifting
commercial dynamics including the new regulatory limitations.
Regarding Basel III capital standards, it is evident that there
exists divergence of opinions, the Institute of International
Finance, for instance, is the opinion that a potentially large
influence, whereas, Basel Committee anticipated a definite
partial impact. Theoretically, implementation window ought is
seen as a novel chance to pick out probable unintended
outcomes in addition to being an opportunity to execute

changes, and if, essential. The anticipated impacts in regard to
Basel III are expected to be incurred within the transition phase
from Basel II to Basel III. In this context the other impact allied
to Basel III would be witnessed where instances of extended
implementation are allowed for this would ascertain retention of
earnings which could improve capital ratio adequately;
however, if the industry regulatory agencies set explicit
specifications the banks would be in a position to integrate
Basel III effectively without being hindered by any Basel II
implementation directives. On the other hand it ought to be
realized that Basel III reforms are not designed to alter the
principles of risk based capital values.
2.14. Why Basel III
Basel III is definitely an all inclusive package of reconstruction
measures, developed explicitly by Basel Committee on Banking
Supervision, the underlying objective being to reinforce
supervision, risk management including regulation of the entire
banking sector. These objectives are designed to sustain and
equally improve the banking industry capability to withstand
financial instabilities or shocks. This also includes the aspects
of proper risk management objectives in addition to reinforcing
the banks openness and disclosures. These reform objectives are
enshrined within bank level, regulation, or micro prudential
which is paramount in stabilizing the resilience of each banking
organization. The other re-structural aspect regard macro-
prudential along with system wide risks which can be instituted
across all financial spheres including the procyclical
augmentation of the identified risks within any period. Basel III
has explicit capital specification which directly aims at target
ratios as well as transitional interlude which all financial
organizations are expected to adhere to the latest specifications.
The Basel III regulatory specifications are intended to make the
financial markets more secure by reassessing and readdressing
some of the inadequacies which are exposed by Basel II flaws in
the current financial crises. Thus the reason Basel III is better

than Basel II can be attributed to the fact that it aspires to
improve the quality and equally the depth of capital in addition
to renewing the aspects of liquidity management and this would
result in banks improving their specific risk management
capacities. Thus, if the banks embrace these dynamics they
would be in a superior position for carrying out their business
without losing focus on their consumers, government
regulations as well as investors demands. That is why Basel III
has its focus etched on capital and funding. Clearly, it specifies
latest capital target ratios, which is explained as key Tier 1.
Basel II failed to address these issues and more so it ignited a
series of critical issues which almost crippled the entire global
financial sector. It failed to address the deep issues which
supported the financial industry, such as capital and leverage
ratios as well as banks risk management capabilities. By
allowing financial institutions to set their own capital
specifically as well as internal regulations it allowed for weak
lines to develop. Hence, Basel III stands as a more satisfying
solution after Basel II failed. The mechanics of Basel III
implementation including its regulatory specifications
demonstrates how superior its. Likewise, Basel III has provided
a secure environment on which banks can build capital as well
as funding stocks through taking off their books by employing
numerous procedures. The other measures tied to Basel III
regards improved capital and liquidity management, business
model restructuring as well as balance sheet reforms. Even
though Basel II had numerous benefits, Basel III has been
shown to be more engaging, secure and is also more sensitive to
systematic risks than is Basel II. The new Basel regulatory
approach has drawn a profound distinction regarding regulatory
transformations serving the typical interests along with the
regulatory shifts that benefits slim vested concerns due to
dogmatic capture.
2.15. Basel III Advantages
With Basel III, banks are required to hold high capital levels

against their total assets. This requirement has facilitated the
way they decrease their individual balance sheets as well as
their ability to execute individual leverage. Basel III regulations
holds numerous and beneficial changes which are imperative to
financial agencies capital structures. Basically, the lowest ratio
of equity, as a percentage of overall assets, under Basel III will
rise from 2 percent to 4.5percent. And there is also an
additional 2.5 percent which is required to act as a buffer, and
this accumulated total equity requisite to 7 percent. The
advantage of this configuration is linked to the fact that the
buffer could be exploited in times of financial or economic
stress; though it is projected that banks may have to wait up to
2019 so as to implement in full these changes and this would
help in averting lending freeze, while allowing the banks to plan
the best way of implementing Basel III regulatory specifications
and at the same time improve their individual balance sheets.
Despite such measure, banks profitability may in a way shrink;
however the scope of maintaining 7 % equity will compel many
to maintain a much greater ratio so as to have a guaranteed
cushion. On the other hand, stable financial institutions will be
in a better position to issue debt at a much lower percentage,
while capital markets may equally assign greater price earning
ratio to these banks with minimal risk capital reforms.
2.16. Basel III and Financial Stability
There is an expansive body of solid evidence that many of the
severe financial crises are correlated to banking industry
distress. While their may exist a substantial variation in regard
to research findings, the Basel Committees financial impact
investigations have established that the core estimate within the
financial literature is that financial crises creates losses in
regard to economic output across various financial settings. It
ought to be noted that banks happens to be compactly leveraged
organizations despite being at the heart of credit intermediation
procedures. In regard to the dynamics and mechanisms of
banking sector, Basel III can not be considered as being the

absolute remedy for all challenges within the existing financial
systems. However, with amalgamation of other existing
measures as those of Basel I and Basel II, it would definitely
help in establishing a more reliable financial configuration. As
a consequence, more improved financial and economic stability
will equally create a steady and vibrant economy, with minimal
risk predicament fueled recessions like those witnessed
following recent financial meltdown in 2008-2009. In this way,
these regulations would greatly aid in limiting the likelihood of
future crises. This is associated to the fact that financial
institutions lending as well as proviso of credit forms the core
of the primary dynamics that fuels financial activity within the
modern financial integration. Thus, any stipulation projected
towards limiting or restraining the provision of any kind of
credit would injurious disrupt the course of economic growth.
However, due to the outcomes of recent financial stress,
countless regulators, capital market participants as well as
common investors are adopting or accepting slower financial
growth for the sake of long term financial stability with a
decreased instance of a repeat of activities leading to 2008 as
well as 2009 financial crises. Examining the current financial
systems configuration it becomes instrumental to assert that
Basel III regulatory specifications have established a new wave
of capital investment. Hence, banks are more willing to
undertake risks while increasing their capital ratio. According
to numerous financial pundits, the scope of Basel III over Basel
II have helped the economy in way that credit facilities are
more integrated while risk management parameters allows the
financial institutions to be actively involved in more open
economic activities.
2.17. Benefits of stringent regulation
The primary objectives of Basel III restructuring are to restrain
the likelihood as well as severity of future predicaments. These
benefits would entail a number of various expenses emerging
from stringent regulatory capital as well as liquidity

specifications and more severe and invasive supervision
(Braveman 2004). However, numerous studies have established
that society benefits outweigh the costs allied to individual
financial organizations. Hence, the BCBS long term financial
impact appraisal established that financial establishments could
improve on their capital along with their liquidity requisites
above the specified minimum ratios, while at the same time
attaining upbeat net economic advantages. That is why it is
widely recognized that prudent financial as well as monetary
strategies are the foundation of any institutions fiscal stability
as well as sustainable economic development. In reality,
sustaining conservative monetary as well as inflation strategies
entails a great deal of funds, and they may result in probably
lower short term financial development, which is offset by
improved sustainable growth (Chhokar, Brodbeck, & House
2007). In the same way, increasing and improving stability of
the financial as well as banking system would call for analogous
trade-off, in a situation where costs tend to exceed offset by
long term benefits. What this illustrates no country can sustain
healthy economic growth if the banking system is weak; hence,
the dynamics of Basel III becomes realistic and highly
effective.
2.18. The new requirement for liquidity and capital conversion
buffer
BCBS (Basel committee on banking supervision), on wake of
December 17th 2010 published its detailed specifications
designed to reinforce the pliability of the banking industry.
These suggestions followed a period of seamless considerations
by financial regulators as well as various government agencies
on the causes as well as the lessons of the monetary crisis. The
sole objective of the banking reforms were designed to improve
and sustain a reliable banking that would successfully suck up
shocks caused by financial or economic crisis, no matter the
nature or their source. Examining the laid down requirements it
would be paramount to assert that the new liquidity and capital

conversion buffer is highly acceptable. The new packages
presented by Basel III sheds more light on banking and have
helped in improving the overall management along with the
governance of banks and this has resulted in more transparency
together with disclosures. Exploring the primary aspects tied to
the new requirements, Basel III capital and liquidity buffer has
been integrated with the banking resolutions associated with
systematic cross banking transactions. In this way a new pliant
banking structure has evolved to be the base of a new financial
growth. In this way, financial institutions have managed to
provide decisive services to their clients. The scope of capital
and liquidity buffer has been integrated with global capital
structure. In this way the assimilation has become acceptable
across all levels of banking industry (Leslie 2002). This has
been facilitated by the formulation of new regulatory
configurations under Basel III. Such changes have assisted in
improving both the quality and quantity of the existing or
anticipated regulatory capital base in addition to improving the
risk reporting of the capital framework. The reason why the new
requirements have been highly accepted is due to the fact that
Basel III has parameters that are underpinned within a leverage
ratio which acts as a fallback to the various risk-allied capital
measures. And since the banks risk exposure ought to be
supported by unquestionable superior capital base, Basel III has
injected the concept of enhancing the quality, transparency as
well as the transparency of the involved capital base. Thus, the
developed regulation has satisfied the banking criterion in
addition to allowing the banks to manage emerging
inconsistency while reducing market losses. Another important
aspect is allied to the significance of facilitating comparison of
value of capital between various financial institutions. Through
such arrangements, the scope of capital and liquidity conversion
is etched within the capital which is also correlated to common
shares along with the retained earnings. In this process the
capital and liquidity buffer has enjoyed a sustained standard
through a systematic set of principles. These elements are

likewise tailored to fit within the context of non-joint
organizations to ascertain they sustain analogous levels of tier 1
capital. Looking at the development of conversion buffer, it can
be stated that the reason why liquidity and capital conversion
buffer has within the new regulations become acceptable, is due
to the fact that Basel III has systematically managed to
strengthen and improve on risk coverage within the capital
market framework.3. Research Methodology
The methodology preferred for the study centered on interviews,
close observation as well as discussion. Though the entire
project is anchored on study research, it was paramount to
compile maximum data from the banking organization. The data
concerning the products as well as services of the organization
can be acquired either from the organizations personnel’s or
their clients. In principal there are two major channels on which
the information is collected and equally execute the outcomes
later. They are identified as primary sources along with
secondary sources. Because of the tremendously detailed and
intricate nature of the Basel accord framework as well as the
fact that only a limited amount of secondary and primary data
all is publicly available, this study was subject to certain
assumptions. Secondary data attained for the discussion was
acquired through internet searches as well as borrowing
retrieved data from the respective databases on annual accounts
and national risk reports from the year 2010. This means that
the incurred risk factor and experienced shocks resulting from
risks and losses in the banking industry during the preceding
years on the banks’ balance sheets was not incorporated into the
study. Otherwise, the data acquired was used to evaluate the
Basel III framework using the capital ratios and liquidity
standards calculated from these figures, keeping in mind that
the attained ratios are within the minimum levels. This can be
said for both the individual institutions and the group within the
Basel Committee (King, 2010). Moreover, the assumptions that
the framework of the third Basel accord will come in to full
effect is applied, while also assuming that the peripherals

around it will immediately, without transitional arrangements
come to full effect. However, the study’s retrospective analysis
fails to consider how Basel III affects risk-weighted assets due
to the fact that there are still uncertainties on the precise effect
impacted by the new Basel III framework (Danske Bank, 2011).
To this effect, a second assumption concerning risk-weighted
assets (RWAs) was made as banks tend to disclose both RWAs
based on Basel I and Basel II due to the transitional rules
identified in section 5.1.1.2. The evaluations in the study will
therefore, use these two assumptions to assess the overall
effects and advantages application of the Basel III accord
towards meeting the goals and aims of this study.
3.1. Primary sources
Primary sources are identified as the sources which have never
been exploited or discovered or presented in the written format.
Primary data is principally new and is instrumental in research
work. It ought to be noted that it is highly effective and
efficient in tackling any emerging primary questions. Primary is
typically gathered in two core processes namely: interaction
with the organization personnel’s as well as branch manager.
The other involves personified interaction with the clients
seeking the organizations services (Henry 1990)
3.2. Secondary Sources
These sources entail using the existing or the data which has
been previously used by someone else and is available in
various formats. Since the information has already been used or
published, that why it is referred to as secondary data (Hofstede
2001). This information can be acquired from, circular,
journals, annual reports as well as the financial and capital
markets websites3.3. The effects of Basel III regulations on the
performance of banks
Recent financial crises have exposed numerous flaws within the

global regulatory structures as well as in banks risk
management procedures. As a consequence, numerous
regulatory agencies have explored countless superior measures
with the intention of reinforcing financial markets stability
(King 2000). One of the primary objectives is to reinforce
global capital as well as liquidity rules and this is to be
achieved through successful implementation of Basel III. The
central goal of Basel III regulation is to enhance the financial
sector liability globally. The effects of Basel III regulations on
the performance of financial institutions are wrapped by the
introduction of new fiscal regulations which are improved.
These regulations have as well introduced a more severe and
concentrated definition of capital.
The scope of such dimensions is to increase and augment the
quality, transparency as well as the constancy of capital base in
addition to the introduction of novel global liquidity base. The
impact of the new regulations launched under Basel III are
instrumental, for instance, the introduction of the two prevailing
liquidity ratios namely: Liquidity Coverage Ration which is
pegged on short term liquidity as well as the Net Stable Funding
Ratio which is tied to long term liquidity ratios. The effects of
these measures are noted within the realm of stabilizing the
banks liquid assets. Despite that Basel III regulation sustains
sound tenets of liquidity risk management. This demonstrates
why Basel III strongly enforces new leverage ratio, which is a
complement associated with risk based Basel II configuration.
Such arrangements has allowed the bank to increase its capital
stipulations allied to counterparty credit emerging from
repurchase accords, derivatives in addition to security financing
undertakings. The new Basel III regulations maintains measures
associated with reduction parameters directed towards
diminution of cyclical effects allied to Basel II, including the
lessening of systemic risks. These instances have profound
effect on the overall performance of banking units. The broader
aspect of Basel III has contributed to the way these institutions
treats capital conservation as well as countercyclical capital

buffer, hence these measures influences the banking activities
increasing the productivity while limiting instances of direct
loss which can be as a result of internal or external financial
shock. The effect of Basel III regulation has thus resulted in an
increased capital requirements and this has propelled an
increase in capital including liquidity costs more so piling up
pressure on banks revenues. In this way it can be said that other
factors affecting performance includes regulatory capital which
has seen Basel III integrating Tier 2 capital and thus
harmonizing the overall instruments. Likewise, risk coverage,
leverage ratio, pro-cyclicality as well as liquidity standard have
all been improved, and this has contributed to the positive
performance within the banking industry. And this is the
primary factor that has compelled the US government to
promulgate the popular Dodd-Frank Wall street Reform together
with Consumer Protection Act. The objective being to establish
a solid as well as rigorous supervision framework within the
banking sector and this has considerably boosted banks
performance (John 2000).
3.4. The cost banks bear after the adopting Basel-III
As early as mid-2007,an emerging group of people among
policy makers, financial analysts, economists as market
operators have vehemently and persistently accused Basel II
regulatory framework for existing and emerging banks capital
adequacy to be the root cause of the prevailing subprime
financial woes. Examining a number of financial market
functioning aspects, majority of the reigning banks turns to be
the major suspects. All in all, the emerging questions
demonstrate that it is possible to ascribe to the principals
correlated to the implementation of Basel III. In this regard the
banks bear the responsibility of adopting the new regulatory
framework. Since the formulation of Basel III is etched on more
sophisticated dynamics different from either Basel I or Basel II,
the obvious position is that banks will have to facilitate the cost
of strengthening the rules of Basel II by adopting Basel III. The

cardinal costs the banks would in the process of adopting Basel
III would entail instituting news rules in regard to tighter
capital as well as liquidity specifications as outlined by the
Basel Committee on Banking Supervision. This would result in
costs since both capital and liquidity directive have an impact in
regard to the cost of financial establishments intermediation.
Noting that banks are expected to hold additional capital, that
is, they ought to deleverage, yet the projected ROE as well as
cost of bank debt do not change at all, this would compel the
bank to raise lending spreads, as a measure to compensate its
increased funding of Basel III implementation. Majority of the
suggested changes to global capital standards enshrined within
Basel III such as a more compact and restrictive definition of
dogmatic capital, increased minimum regulatory capital as well
as capital conservation along with countercyclical capital
buffer, so as to improve on the banking capability to withstand
losses and equally move with their activities, and all these
would require banks to invest heavily so as to ascertain these
changes are implemented within the designated timeline. The
other costs the banks bear regards interconnecting new
regulations with the emerging expansionary phase designed to
increase the pliability of the banking industry. Also reinforcing
Basel II elements to be consistent with Basel III specification
would as well call for massive investments where
countercyclical capital would be structured to sustain the capital
conservation buffer. What this illustrates is that adapting Basel
III regulatory framework would require concentrated
investments as well as well defined procedural implementation
so as to avoid spill-over’s in the course of completion. These
costs are also directly associated with other adaptation
procedures which are instrumental in the way the banks adjust
to the projected regulatory and structural changes (IFC and
World Bank 2008). More so, the constrain leverage aspect in
the banking aspect would likewise be an additional cost since it
would be employed as a tool of mitigating the risk of the
destabilising deleveraging procedures which can adversely harm

both the financial system as well as the economy. The
introduction of Basel III extra safeguards against model risk as
well as quantification error through supplementing the risk
based determinants with transparent, just, and independent
determinant of risk.4. Empirical Evidence
4.1. Earlier studies
Investigating the scope of banks capital structures, performance
as well as regulatory frameworks, it is evident that Basel I, II
and Basel III differs considerably. The existing scientific
evidence demonstrates that Basel accords when employed
defined how banks functioned including the most preferred and
effective regulatory procedures which ascertained their optimal
performance, how expensive capital requisites are, even how
massive the gains emanating from debt financing are (Giddens
1996). The observed trends illustrates there are numerous
procedures there are dissimilar time periods, investigated
environments including datasets employed in Basel accords.
That is why majority of Basel studies have recognized two
unique sets of correlated factors manipulating productivity:
bank specific as well as external determinants. The primary
group holds variables like overhead costs, capital ratio, and
bank size, funding expenses, risk, income share as well as
ownership among others. While the other segment concerns
industry specific features such as tax rate, GDP growth,
population density, as well as term framework of interest rate in
addition to market capitalization. The findings of investigations
carried on 15 European Union members over duration of six
years from 1995 to 2001 shows that numerous banks operated
from dissimilar script, while another study carried out in 2011
shows that Basel III could provide banks with specific attributes
etched on financial market frameworks, where macroeconomic
stipulations would be held aggressively. Hence, the results also
illustrates that under Basel II banks profitability
divered;however,the latest Basel accord have indicated that
dimension as well as the banks profitability are conservatively

correlated, though this relationship is not adequately significant
(George 2000; Fiksdal 1990). The failure of Basel II as is
presented by the EU could only be rectified by employing the
new characteristics of Basel III such as loan to asset ratio which
previously was employed as a core proxy for anticipated risk.
The research findings positively recognized that Basel III could
have tremendous but positive impact. To understand the
significance of Basel III over Basel II, and why Basel III was
needed after Basel II failed can be established through
evaluation of ROE (return on equity). Under Basel III it is
estimated that ROE on investor’s equity is systematically
reinforced. While on the other hand the findings showed that
Price to Book Ratio under Basel III could contribute to the
reduction of over evaluation as well as misinterpretation of
banks overall performance. Similarly, Excess Return was also
found to determine the banks performance in relation to risk
adjusted presumption. In this way it was found Basel III model
was more appropriate and helpful since its implementation
allowed the financial institutions to create buffer zones which
embraced financial predictors. Some of the predictors identified
included total capital ratio tier I, which the banks are expected
to embrace as proxy for their projected leverage; hence, Basel
Committee defines it as the banks principal equity, that is,
shareholder equity as well as disclosed reserves, in regard to
RWA. And this has evolved to be a predominant aspect of Basel
III regulatory framework since it is instrumental in appraising
the monetary agency strengths as well as capacity to handle
distressed situations. Thus, an increased ration meant an
increased stability for the financial industry. Risk Beta which is
employed to estimate stock volatility in relation to other capital
market index was exploited to reflect on how additional capital
could manipulate market volatility. It was noted that Basel III
had more authoritative impact than Basel II since it facilitated a
strong correlation involving security return along with the
return on an indicator.

4.2. Current Studies
The existing studies regarding Basel III are designed to make
the international financial activities less vulnerable but more
secure. The consequences of the study carried on various
European and American banks have shown that Basel
Committee on Banking Supervision had embarked on realizing
an all inclusive set of regulatory procedures. It has been thus
instituted that the core attributes of Basel III regulatory
dynamics are basically re-evaluated capital adequacy principles,
as well as new liquidity ratios in addition to risk weighted
possessions. To estimate and quantify the qualitative effect of
the projected regulations, BCBS and on behalf of EU-
Committee of European Banking Authority executed a QIS
(quantitative impact studies) jointly with other international
supervisory agencies. The QIS executed by Basel committee
globally involved a total of 263 financial institutions across 24
countries. On the other hand CEBS conducted its own QIS
which consisted of 230 monetary agencies from 21 banks in
Europe. 18 of them were Australian, which has not been
absorbed into BCBS (European Central Bank 2009). These two
investigations heavily differed in regard to banks linked to tier
1 capital as well as with other banks. Since the involved data
was compiled through consolidated procedures, it emerged that
these organizations preferred the implementation of Basel III
over Basel II since it guaranteed more openness and flexibility.
These results showed that minimal capital specifications as well
as capital conservation buffer of the anticipated subsidiaries had
unrestricted acknowledgment. Hence, under Basel III the
calculation of minimal interests receiving recognition is to be
anchored on the banks minimal capital ratio. Due to such
changes as well as shifts in regulatory preferences Basel II
failed to facilitate the stability of banks minimal capital ratios
which under Basel III were found to be highly imperative to the
overall profitability as well as quantification of capital ratios as
well as leverage ratios among other financial calculations
correlated to the banks operations. In this respect Basel III did

recognize some features which were paramount to the banking
industry but were ignored under Basel II regulatory
specifications. The scope of capital, as well susceptibilities
exposed by liquidity showed that Basel I and II had ignored
these aspects completely, and this necessitated the need for new
liquidity specifications. This was important since all financial
establishments relies on the way the handle liquidity for their
own survival.however,despite these changes it has emerged that
there are some aspects which did not change despite Basel II
being a failure (Erickson 2000). Some of these elements which
are supported by both Basel II and III regard allowing
international financial organizations to exploit internal risk
prototypes as their principal determinants of their accumulated
capital requisites. Within the premise of financial
establishment’s regulatory frameworks, this loop has raised a
lot of concern for it appears it tends to give multinational
banking agencies a room for complicity while ignoring the
small or domestic banking establishments, its one of the few
setbacks associated with Basel III.4.3. Basel III Future
Basel III is an enormous challenge for all financial
establishments including financial regulators and bank
supervisors. It is in essence not each Basel III requirement is
completely defined and the accord execution is still at its
primary phase. However, the transition phase is quite long, and
this would give banks a chance to evaluate and monitor their
specific ratios before projected 2019 deadline. Numerous banks
intend to adhere to the Basel III requirements even earlier so as
to restore confidence the markets as well as rating
establishments of their trustworthiness. However, despite these
provisions the impact on financial establishments is anticipated
to be analogous due to the different banking engagements
(Cornelius 2001).
4.4. Essential Guidelines for successful implementation of Basel
III in banks

Implementation of Basel I and Basel II have demonstrated that
lack of explicit clarity can be disastrous in regard to
implementing any banking policy. As a consequence the
banking industry is required to make positive attempts which
would help in understanding the adequate and effective
framework to employ. As presented by Basel II experience, it is
advisable that early impact appraisal be executed. Thus, for
successful implementation of Basel III accord, assessment of
strategic options, robust planning as well as preparation stage
must be well designed. Thus, the financial establishments must
maintain flexibility and equally adapt to the anticipated
modifications as well as other associated developments (Lester
2002). Due to the rapid changes within the banking industry, the
roadmap to successful completion of Basel III must thus
embrace impact analysis. The scope of impact analysis would be
instrumental in validating Basel III ratio breakdown,
enhancement of adjusted RWA quantification, as well as
sustaining positive and productive relationship with rating
agencies. The other factors would consist of having a stable
straight-looking capital administration and planning,
profitability and VA evaluation, in addition to identification of
core areas that need to be improved. Valuation of strategic
preferences also forms a core pillar by which effective Basel III
implementation rests. Since the implementation of Basel III is
tied to implementation procedures, this aspect is vital in as far
as satisfactory implementation guideline is concerned. The core
elements associated with this step regards; evaluation of capital
as well as liquidity management policies and strategies, capital
market dealings, transaction and product line modification in
addition to divestments and wind-downs assessments. The other
important procedure regards preparations. The success of Basel
III is determined by the way the banking sector is prepared,
since each given bank has its own internal operating
mechanisms, it is thus pivotal to point out that being fully
prepared is essential. The scope of preparation would foresee to
it that: banks have working design that improves both capital

and liquidity administration framework. Too, preparation would
as well ascertain proper plans for funding along with improved
liquidity profile are in place. And it is through this engagement
that product design and redesigning are achieved. Despite that,
the implementation process would include executing transparent
divestments as well as capital market transaction. More so, this
would ensure that banks do cater for adjusted external reporting
of their financial activities. In essence, preparation plays a
major role in as far successful implementation of Basel III by
banks is concerned. This guideline ascertains that the successful
implementation of Basel III is etched on the Basel III amenable
liquidity along with funding, process design, reporting, as well
as business line amalgamation or separation. When the above
steps are integrated the implementation becomes a principal
ongoing monitoring process based on Basel III parameters.
Likewise it would allow effective communication between the
banking and the associated players who include rating agencies,
shareholders as well as supervisors and the stakeholders.5.
Conclusion
The failure of Basel II ushered a new wave for more dependable
financial regulatory structures, this in essence was necessitated
by the catastrophic financial meltdowns witnessed across the
world from 2008 to 2010. From financial perspective, Base II
was not based on stringent financial pillars; it had allowed
financial organizations to embark on self regulation which did
cater for financial shock, or unforeseen capital stress. As a
consequence, Basel Committee saw it necessary to re-evaluate
Basel II and came out with Basel III regulatory framework. In
practice, Basel II had neglected lower rated financial
institutions in favor of international banking corporations.
However, the evolution of Basel III is beneficial to all financial
systems globally. After Basel II failed, Basel Committee
outlined how Basel regulations would be implemented and this
resulted in the formation of Basel III which was consisted of
goal oriented attributes such as: introducing a leverage ratio,
executing Basel III, instituting extra buffers, enhancing

liquidity, recognizing the failures of both Basel I and Basel II,
in addition to increasing both the quality as well as quantity of
capital, including handling SIFIs (systematically important
financial institutions).also, the way Basel III has been
developed it would allow symmetrical comparison between the
banks outflow as well as inflows. Likewise, the new regulatory
approaches have shown they will compactly improve the banks
reverse repos, loans, including secured funding from other
financial establishments (Braham 2000). This has made
substantial balances in regard to inflows and outflows which
were previously ignored. In this way, the correlated liquidity is
maintained so that it is not detached from the evaluation at the
general level. Treatment of financial establishments has also
been highly assessed under Basel III, the new accord has moved
towards the reduction of interconnectedness as well as the
possibility of contamination in time of crisis. Since, Basel I and
Basel II did not adequately maintain a solid safety level, the
new aspects suggested by BCBS in regard to Basel III appears
to be quite satisfactory. Though, there are numerous issues
which can be raised in regard to efficiency of Basel III; but the
systematic dynamics of the new system has more advantages
which are more beneficial to the society as well as the banking
organization. The introduction of 30 day LCR (Liquidity
Coverage Ratio) which is projected to advocate short-term
resilience to potential liquidity disruptions is paramount. This
aspect is anticipated to ascertain financial institutions have
adequate high value liquid assets. Unlike in Basel II, the impact
of this new principle is to reduce the effect of risk within the
banking industry and more so, sustain stability at all time round
(Barth, et al 2006). These elements with others make Basel III
more strong and secure. That is why under Basel III financial
establishments are being forced by the current financial markets
as well as rating agencies to hold and equally maintain an
increased leverage ratio greater than that mandated by the
regulator. And in this way, Basel III will succeed where Basel II
failed and more so make banking industry more

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4

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