Basel Norms

Basel Norms
Evolution of Basel Norms and their contribution to the Subprime Crisis
The article highlights the emergence of the Basel Accord in 1998 and how it has evolved over the
course of the last 23 years. Contrary to the popular belief capital regulations have been considered
the biggest underlying factor of the subprime crisis owing to securitization, the shadow banking
system and the flexibility given to banks in risk assessment. The recent Basel III norms though aim
to mitigate the already caused damage, the results are still left to be witnessed.
Evolution of Basel Norms and their contribution to the Subprime Crisis
The article highlights the emergence of the Basel Accord in 1998 and how it has evolved over the
course of the last 23 ... Show more content on Helpwriting.net ...
The Basel Capital Accord (Basel I) was adopted in 1988, and had two main objectives; * Strengthen
the soundness and the stability of the international banking system – minimum capital adequacy
ratio by assessing the credit risk of the banks * Create a level playing field among international
banks – Banks from different countries competing for the same loans would have to set aside
roughly the same amount of capital on the loans
Fallout of Basel I and emergence of Basel II
Basel I set the platform for maintaining the adequate capital cushion required by the banks in the
event of a default or grim situations. However the adequate capital (Tier I & Tier II) to be
maintained was solely based on the credit risk (on–balance sheet, trading off–balance sheet, non
trading balance sheet) assessment which was divided into 4 categories of Government Exposures
with OECD countries – 0%, OECD banks and non – OECD governments – 20%, Mortgages – 50%,
Other Exposures, retail and wholesale(SMEs) – 100%
Though the main aim of formulating the Basel Norms was to ensure the optimal capital cushion to
be maintained required in the event of a crisis, the very introduction of Basel Accord, increased the
gap between economical and risk–based capital and gave rise to regulatory capital arbitrage (RCB).
The drawback that a loan to a safe industrial country and that to a volatile developing country
... Get more on HelpWriting.net ...

The And Soundness And Stability Of The International...
A.
Basel I contained two primary objectives, the first is to help to strengthen the soundness and
stability of the international banking system, the second is to alleviate competitive inequalities.
Basel I not only increases sensitivity of regulatory capital differences in risk profiles, in addition, it
considers about balance sheet exposures when assessments of capital adequacy are undertaken(Ojo,
Marianne 2011). However, the framework also discourages banks to keep liquid and low risk assets,
and it is hard to evaluate whether the minimum capital requirements for banks do harm to their
competitivesness or not and whether this framework increase competitives inequalities amongst
banks or not.
Basel I focus more on credit risks instead of the operation risk, which bank face day–to–day
problems in their business. In order to deal with this problem, Basel II creats an international
standard about the quantity of capital provisions the bank should to guard against financial and
operational risks they face. Basel II was established to achieve three committee objectives, first is to
increase the quality and the stability of the international banking system, second is to create and
maintain a level playing field for internationally active banks, the last one is to promote the adoption
of more stringent practices in the risk management (Saidenberg et al., 2003). First two goals are
important part of 1988 Accord while the third one is new regulatiton to the systems. The need for

Operational Risk Management in Banking Sector: an Overview
ReseaRch PaPeR
Commerce
Volume : 3 | Issue : 1 | January 2013 | ISSN – 2249–555X
Operational Risk Management in Banking Sector: An overview
Keywords
Rakesh Chutia
Assistant, State Bank of India Margheita–786181 Dist.–Tinsukia Assam
ABSTRACT Operational risk is inherent in all banking products, activities and processes and
systems and the effective management of operational risk is of paramount importance for every
bank's board and senior management. With globalization and deregulation of financial markets,
increased competition combined with the advent of high–end, innovative, sophisticated technology
tremendous changes have taken place in the products distribution channels and service delivery
mechanism of the banking ... Show more content on Helpwriting.net ...
Business disruption and system failures. For example, hardware and software failures,
telecommunication problems, and utility outages. Execution, delivery and process management. For
example: data entry errors, collateral management failures, incomplete legal documentation, and
unauthorized access given to client accounts, non–client counterparty misperformance, and vendor
disputes. OPERATIONAL RISK MANAGEMENT PROCESS: Operational Risk management
generally encompasses the process of identifying risks to the bank, measuring exposures to those
risks), ensuring that an effective capital planning and monitoring programme is in place, monitoring
risk exposures and corresponding capital needs on an ongoing basis, taking steps to control or
mitigate risk exposures. Identification of operational risk. Banks should identify and assess the
operational risk inherent in all products, services, activities, processes and systems. Effective risk
identification should consider both internal factors (such as the bank's structure, the nature of the
bank's activities, the quality of the bank's human resources, organizational changes and employee
turnover) and external factors (such as changes in the industry and technological advances) that
could adversely affect the achievement of the bank's objectives. Assessment of Operational Risk. In
addition to identifying the risk events, banks should assess their vulnerability to these risk

Key Elements For The Basel IIi Capital Adequacy Framework
1. Introduction
In the aftermath of the financial crisis of 2007 – 2009, the Basel Committee of Banking Supervision
launched a program that substantially revised the existing capital adequacy guidelines. As a result,
the Committee released a new version of bank capital and liquidity standards, referred to as "Basel
III", in December 2010. Subsequent guidance was issued in January 2011 regarding minimum
requirements for regulatory capital instruments. The G20 , including United States and the European
Union, publicly endorsed the Basel III standards at their November 2010 Summit in Seoul, and
relevant countries around the world have made efforts to study its impacts on their banking industry
and to find the best ways to implement them into law in their respective jurisdictions. There have
been numerous worldwide debates and discussions since its introduction. However, the core
principle of more stringent capital requirement has not been changed and it is now unavoidable for
impacted financial institutions to comply with the new standards. The purpose of this paper is to
summarize the key elements for the Basel III capital adequacy framework and discuss its practical
implications on the financial industry.
2. Background of Basel Committee and Its Accords
The Basel Committee on Banking Supervision (BCBS) was originated from the collapse of the
Bretton Woods system in 1973 that was followed by the financial market turmoil. The failure of
Bretton Woods caused large foreign

Internship Report of Corporate Credit in Bank
CHAPTER I
INTRODUCTION
1.1 Background
Basel Capital accord is a capital adequacy framework developed by the Basel committee. In 1988,
the Basel Committee decided to introduce a capital measurement system commonly referred to as
the Basel Capital Accord. This system provided for the implementation of a credit risk measurement
framework with a minimum capital requirement of 8% on banks Risk Weighted Assets (RWA). The
1988 framework is also known as "Basel – I". Since 1988, this framework has been progressively
introduced not only in member countries but also virtually in all other countries.
The "international convergence on capital measurement and capital standard –2004" is popularly
known as Basel–II. It is a capital ... Show more content on Helpwriting.net ...
The rationale of Basel II was to reduce the scope for regulatory arbitrage and make regulatory
capital requirements more risk–sensitive by incorporating advances made in banks‟ internal risk
management practices in calculating regulatory capital requirements. The „International
Convergence of Capital Measurement and Capital Standards: A revised Framework‟, known as
Basel II, was agreed in 2004 and consisted of three pillars corresponding to minimum regulatory
capital requirements in Pillar 1, the supervisory review process in Pillar 2 and market discipline in
Pillar 3. 1. First Pillar
The first pillar deals with maintenance of regulatory capital calculated for three major components
of risk that a bank faces: credit risk, operational risk, and market risk. Other risks are not considered
fully quantifiable at this stage.
Credit Risk | Operational Risk | Market Risk | –Standardized Approach–Foundation IRB Approach–
Advanced IRB Approach | –Basic Indicator Approach– Standardized Approach–Advanced
Measurement Approach | –Standardized Approach–Internal Model Approach |
2. Second Pillar
This is a regulatory response to the first pillar, giving regulators better 'tools' over those previously
available. It also provides a framework for dealing with systemic

Financial Globalization and Risk Essay
Introduction:
From the beginning of the 1990s, the global financial system has entered a phase of unprecedented
restructuring, marked by the increasing integration of financial markets and increased economic
interdependence. This process, known under the name of financial globalization allows companies
better access to financing, offers investors a greater possibility of investment and thus increases the
liquidity of the global economy.
However, this financial globalization has enormous risks. Indeed, creating an interconnection
between national financial systems, it facilitates the transmission of shocks, contagion . Thus, a local
imbalance turns immediately into a systemic crisis as shown by the recent financial crisis.
Disruption in ... Show more content on Helpwriting.net ...
The Basel committee was established by the central bank governors 40 years ago and since tried to
strengthen the regulation, supervision and risk management of the banking sector. The Basel 3 is
basically rules built on top of the Basel 2 and 1 framework and contains primarily 5 key
improvements that will be explained in details further down the project. Basel 1 and 2 will shortly
be explained but the main focus will be on the Basel 3.
The bursting of the housing bubble in 2007 and the crisis that ensued highlighted the shortcomings
of the banking regulation and forced the international authorities to consider a new agreement on it.
Thus the Basel Committee decided to force banks to implement this new agreement.
Problem area:
Basel III establishes a set of standards for the implementation of a liquidity ratio for international
banks , a leverage ratio , counter–cyclical measures , a redefinition of equity and a review of the
coverage of certain risks . This set of standards will help to strengthen the resilience of the financial
and banking sector in anticipation of further financial and economic stress , regardless of the source.
All of its new measures that the Basel Committee has developed to strengthen the regulation,
supervision and risk management in the banking sector aims to strengthen transparency and
communication within banks,

The Pros And Cons Of The Banking Crisis
Banking crisis has been much more frequent than any of the expectations by research or any of the
banks. The annual probability of a crisis has been judged to be around 4–5% in both the industrial
sector and emerging market countries (Walter, 2010). The banking sector has been effected by many
factors which contributes to its vulnerability. Some of the factors that adds to the vulnerability of the
bank are minimum availability of high–quality capital, lack of high quality liquid assets, and sources
for reliable funding.
After the great economic crisis of 2008 (Subprime crisis), many banks had failed leading to a great
recession. Since the beginning of the financial turbulence which began in the year 2007, globally the
banks have reported a total write downs and losses of more than 888 billion dollars. At the same
time some of them have estimated the overall expected loss of various banks and financial institutes
in the range of 2.2 trillion dollars (Global Financial Report Market Updated, 28 Jan 2009). Banking
crisis are usually associated with significant economic losses. During the crisis many banks had
failed to bring in additional capital which had forced many of them into a ... Show more content on
Helpwriting.net ...
The major problem is with respect to the Ethics in Banking, which was the major cause of all the
crisis and failures. May even a stringent norm come, it will still have some loopholes which the
Banking Wizards will find out. Unless the core of banking which is the "Trust of customer" that is
gained, no bank can ever be successful. If we observe down the lane, we will see that behind all the
failures of the banks was the lack of trust by the customers over banks. And the reason being simple
that the banks had forgone the Ethics for the sake of Profitability. And this is the point where the
main problem starts, for this being the very foundation is

Credit Risk Management and Profitability in Commercial...
Credit Risk Management and Profitability in Commercial Banks in Sweden Ara Hosna, Bakaeva
Manzura and Sun Juanjuan Graduate School Master of Science in Accounting Master Degree
Project No. 2009:36 Supervisor: Inga–Lill Johansson Acknowledgements After several months of
hard work our thesis has been finished. Now it is time to thank everyone warmly who provided their
kind assistance to us. First of all, we would like to thank our supervisor Inga–Lill Johansson,
Associate Professor of our University, for her guidance all through our work. We would like to thank
Andreas Hagberg, PhD Candidate, as well for giving us his constructive suggestions. We are
grateful to Johan Sjömark, Credit Risk Control Department officer in ... Show more content on
Helpwriting.net ...
R2 BCBS CAR CCF Coef. CRD FIRB FSA ICAAP IFRS IRB LGD N NI NPL NPLR PD P–value
R2 ROA ROE RORAC RWA SFSA Signif. TL TSE Adjusted R–squared Basel Committee on
Banking Supervision Capital Adequacy Ratio Credit Conversion Factors Coefficient Capital
Requirements Directives Foundation Internal Rating–based Financial Supervisory Authority Internal
Capital Adequacy Assessment Process International Financial Reporting Standards Internal Rating–
based Loss Given Default Number (of Observations) Net Income Non–performing Loan Non–
performing Loan Ratio Probability of Default Probability Value R–squared Return on Assets Return
on Equity Return on Risk Adjusted Capital Risk Weighted Asset Swedish Financial Supervisory
Authority Significance Total Loan Total Shareholders' Equity iv Table of Contents 1. Introduction
.............................................................................................................................. 1 1.1 1.2 Problem
Discussion ......................................................................................................................... 3 1.3
Research question ............................................................................................................................ 4
1.4 Purpose

The Implementation Of Basel IIi
1 On 20 May this year the Amendment to the Banks Act regulations ("Regulations") in terms of
section 90 of the Banks Act, 1990 ("Banks Act") were published in the government gazette and will
come into effect on 1 July 2016. A number of cosmetic changes have been made to the Regulations
but a few material changes will be highlighted in this alert. 2 Subsequent to the implementation of
Basel III in South Africa on 1 January 2013, the Basel Committee on Banking Supervision
("BCBS") issued revised requirements in respect of a wide range of matters which necessitated
amendments to our regulations. The Regulations now cater for the changes to capital disclosure
requirements, changes to the Liquidity Coverage Ratio ("LCR"), requirements related to intraday
liquidity management and public disclosure requirements related to the LCR. 3 Regulation 38(16)
was amended to incorporate South African Reserve Bank ("SARB") Directive 05/2014 which dealt
with obtaining the Registrar of Banks consent before reducing qualifying capital and reserve funds.
Regulation 38(5)(a)(i)(K) which deals with deductions which need to be made from a bank 's
common equity tier 1 capital and reserve funds has been amended to include "investment in a
foreign branch" in order to clarify the treatment of capital invested in foreign branches. 4 Regulation
38(17) dealing with the calculation of a banks LCR has been substituted by a new Regulation 38(15)
which incorporates the latest Basel III framework as well as

International Convergence Of Capital Measurement And...
1. Introduction
The 2008 Global Financial Crisis (GFC) and its aftermath had critically damaged the world
economy with a drag in global economic growth. Indubitably, the imprudence in which banks
managed their risks and capital holdings were among reasons that caused the crisis. It raised the
need for industry reform, leading to G20's Basel III proposal in 2010 to strengthen the global capital
framework by imposing stricter rules regarding capital and liquidity requirements, as well as a focus
on transparency, consistency and quality. 2. Regulatory Framework
Table 1 highlights the main differences between Basel I, Basel II and Basel III.
Table 1 Basel 1, Basel II and Basel III Basel I Basel II Basel III
Framework One size fits all International Convergence of Capital Measurement and Capital
Standards Firm specific and risk based
Minimum Capital Requirements 8% Total Capital Adequacy Ratio (CAR)
4% Tier 1 8% Total CAR
4% Tier 1
4% Core Tier 1 10.5% Total CAR
6% Tier 1
4.5% Core Tier 1
Measure of Credit Risk Standardized Approach Standardized Approach
Internal Ratings Based (IRB) Approach Standardized Approach
Internal Ratings Based (IRB) Approach
Measure of Operational Risk N.A. Basic Indicator Approach (BIA)
Standardized Approach
Advanced Measurement Approach (AMA) Basic Indicator Approach (BIA)
Standardized Approach
Advanced Measurement Approach (AMA)
Measure of Market Risk N.A. Standardized Approach
Internal VaR

Management Regulations : Basel II
Ch. 2.2 Risk Management Regulations
Basel II Carrying out Framework which is a set of integrated services that enable banks toward
advanced risk management approaches. The framework includes a methodologies, set of tools,
industry's best practices and ready to deploy assets that shorten the implementation time and
suggestively reduce risks rising from noncompliance, poor quality administration, and budget and
time over runs.
The Basel Committee on Banking Supervision is an institution made by the central bank Governors
of the Group of 10 nations – G10 (Belgium, Canada, France, Italy, Japan, the Netherlands, the
United Kingdom, the United States, Germany and Sweden). The Basel Committee frames broad
supervisory standards and guidelines and ... Show more content on Helpwriting.net ...
Basel II sets up rigorous risk and capital management requirements designed to ensure that a bank
holds capital reserves appropriate to the risk the bank exposes itself to through its lending and
investment practices.
Basel II uses a three pillars concept
1 Minimum capital requirements (addressing risk)
2 Supervisory review
3 Market discipline – in order to promote greater stability in the financial system.
The second pillar deals with the regulatory response to the first pillar. It also delivers a framework
for dealing with all the other risks a bank may look, like systemic risk, pension risk, concentration
risk, strategic risk, reputation risk, liquidity risk and legal risk, which the accord pools under the title
of residual risk. It gives banks a power to review their risk management system (van Greuning,
Brajovic Bratanovic, 2009) (Tarullo, DK, 2008)).
To address deficiencies in the financial regulations revealed by the financial crisis affecting the
world since 2008 it was developed a new Basel Accord, – BASEL III. BASEL III is a global
regulatory standard on bank capital tolerability, stress testing and market liquidity risk agreed upon
by the members of the Basel Committee on Banking Supervision in 2010–11. Basel III strengthens
bank capital requirements and introduces new regulatory requirements on bank liquidity and bank
leverage. (Tarullo, DK, 2008)
Some of the measures announced in the new Basel III framework will need banks to hold 4.5% of
common

Basel 2 is the second Basel after Basel Accords known as...
Basel 2 is the second Basel after Basel Accords known as Basel 1. By using Basel 2 in Australia,
APRA (Australian Prudential Regulation Authority) aims to arrange Australian Prudential standards
with worldwide guidelines. The purpose of Basel 2 is to make better arrange regulatory capital with
the single risk profiles of financial institutions, a bank with greater exposure to the risk of peers who
will hold more capital, while the less exposed to the risk that will hold less capital. Picture 1.1
Picture 1.1 shows that Basel 1 (Accord) has a risk–weighted at one hundred percent with $100 loan
to the corporate entity and a total capital charge of $8. Beside that, through a standardized approach
of Basel II, the corporate entity is rating ... Show more content on Helpwriting.net ...
As banks become more innovative in their statistic techniques and methods, they are encouraged to
look at the more risk a sensitive approach that is related (capital reduction) incentives. Third, credit
risk means financial institutions are allowed to choose from one of Standardization approach that
uses risk weighting standards and external assessment if available, or the Internal Ratings–Based
(IRB) approach that uses data from internal risk management systems. A securitization framework
should be use for banks to involve in traditional and synthetic securitizations or similar structures.
Fourth, market risk details the risk engaged in trading book roles and treatment of counterparty
credit risk so as to effectively catch event and standard risk for trade–debt and equity equipment.
Fifth, operational risk defined as " the risk of direct or indirect loss comes from the inability or
failure of internal processes, people and techniques or from exterior events ". 14 Banking
organizations are offered three methods for determining operational risk capital expenses including
the Basic Signal Approach, the Standard Approach, and the Advanced Measurement Approach
(AMA). The supervisory review process (Pillar 2) is generally known as the 'supervisory review
process' but it enforces responsibilities on both managers and banks. It needs banks to have a
process and strategy for evaluating and keeping their overall capital adequacy in regards to their risk

Clients May Criticize Bank Administration Expenses
Clients may criticize bank administration expenses, yet they are a vast piece of what number of
banks profit. Banks can charge expenses for essentially permitting a client to have a record open,
ordinarily if, or when, the record equalization is underneath a certain break–point, and also charges
for utilizing ATMs or overdrawing records. Banks will likewise procure salary from charges for
administrations like clerk 's checks and safe store boxes.
Banks likewise much of the time append a large group of charges and charges when they make
credits. While banks gamely attempt to shield these expenses as imperative to settling the expenses
of printed material et cetera, practically speaking they 're a honeypot of benefits for the bank.
Congress ... Show more content on Helpwriting.net ...
Retail banks as often as possible contend on accommodation, the availability of branches and ATMs
for instance, cost such as(interest rates, and record administration expenses, or some mix of the two.
Retail banks additionally endeavor to market numerous administrations to clients by promising
clients who have a financial records to likewise open an investment account, obtain through its
home loan advance office, exchange retirement records, etc.
The 2007–2008 home loan rise in the United States, and overall credit emergency, highlighted why
banks are so vigorously managed; with such a key part in the economy, wrongdoing or botch among
banks can deliver far–running waves when they come up short.
There are various levels of bank regulation in the United States directed at the government and state
levels. Banks can decide to work under a state sanction or a national contract, keeping in mind the
contrasts between the two are sometimes imperative, or even detectable, to ordinary clients, it has a
noteworthy effect on the regulation of the bank.
State banks get their sanction from, and are managed by, an organization of the state in which they
work, regularly called a "Branch of Banking" or "Division/Department of Financial Institutions." At
this level, controllers can create manages on allowed practices and limit the measure of premium
banks can charge for

The Effects of Bank Regulation on the Relationship Between...
Comparative Economic Studies, 2015, (31–54) © 2015 ACES. All rights reserved. 0888–7233/15
www.palgrave–journals.com/ces/ Survey Article The Effects of Bank Regulation on the Relationship
Between Capital and Risk ALESSANDRA TANDA Department of Economics, Management and
Quantitative Methods, Università degli Studi di Milano, Via Conservatorio, 7, Milan 20122, Italy.
E–mail: alessandra.tanda@unimi.it Capital regulation acts as an external force in the determination
of bank capital and risk levels. Changes in the regulatory framework can influence banks' decisions.
Starting from the debate of the prudential regulation after the financial crisis, this paper reviews the
main empirical contributions on the role of capital ... Show more content on Helpwriting.net ...
THE EFFECTIVENESS OF THE BASEL REGULATORY FRAMEWORK ON BANK CAPITAL
Bank activity is characterized by asymmetric information. Depositors cannot monitor the quality of
banks' assets and doubts on the solvency of banks might lead to panic and 'bank runs' (Llewellyn,
1999). If this should occur, depositors will be induced to withdraw their savings, causing a liquidity
crisis for the bank that can potentially lead to the failure of the intermediary. Moreover, doubts
regarding the solvency of one bank can create worries about Comparative Economic Studies A
Tanda Capital Regulation and Banks' Behavior 33 the solvency of other banks, leading to a
generalized panic. Bank runs are considered as extreme events that are potentially highly disruptive.
This was demonstrated during the latest financial crisis, when banks faced the threat of a bank run,
not only by depositors, but also by institutional investors. In fact, following the 2007–2008 crisis,
the interbank market almost dried up, suggesting that bank runs may move from the retail to the
wholesale market. To prevent bank runs and their effects, governments usually create implicit or
explicit guarantees to protect depositors (for a concise review see Allen et al., 2009). Deposit
insurance schemes however might produce unwanted effects and increase moral hazard because
they can induce banks to take higher risks.1 Prudential authorities enforce capital regulation2 in
order to limit bank

Financial Crisis And Basel Capital Adequacy Accords
Financial Crisis and Basel Capital Adequacy Accords
Module identifier: AC30500
Student number: 149016382
Introduction:
Financial crisis has been regarded as one of the most important issues in recent years, especially
after the previous financial crisis during 2007–2009. As the impact of the financial crisis is growing,
the way to restrain and prevent the financial crisis has become the main research direction. This
essay is going to analysis the improvement of the financial market, thereby preventing and
suppressing the occurrence of the financial crisis. Firstly, the background of the financial crisis will
be introduced. Secondly, the main contributing factors of the financial crisis in 2008 are going to be
discussed, for example, subprime mortgage problem, financial innovation problems, credit rating
agencies problem within financial market. Thirdly, the role and influence of the Basel Accords are
going to be analyzed, particularly looking at changes of capital adequacy through Basel I, II, and III.
In the end, the relationship between Basel Accords and financial crisis are going to be explored,
going through the Basal Accord's impact on the financial market. Some of the main points of this
essay are going to be summarized in the conclusion such as Basel Accords are helpful for
stabilization of the financial market.
Background:
There are a lot of research indicated that start point of the previous financial crisis is from the US
financial market

The Basel IIi Regulatory Framework And Its Implication For...
Critically Analyze the Basel III Regulatory Framework and its implication for financial Institutions.
Introduction Basel III is a far–reaching set of reform measures developed by Basel committee on
banking administration and risk management of banking industry. The third segment was developed
in response to the deficiencies in financial regulation which were highlighted in 2007 –08 financial
crisis. The outcome of the 2008 Financial Crisis (which begun in 2007), has witnessed numerous
changes one of the changes was the need for an enhanced Basel ll framework which had failed
miserably during the 2007– 2008 financial crunch. After the global financial crisis, the G20 and the
Basel Committee on Banking Supervision planned a series of new bank capital and liquidity
guidelines called Basel lll. The first version of Basel lll was drafted and published in late 2009. Later
on 12th September 2010 the Basel committee announced the new capital and liquidity ratios and the
timeline by which banks need to fulfill the requirements. Once implemented new changes will have
a drastic impact on the banking sector. It will mark an end to asset driven liability management
which will force the banks to adapt the characterized banking or we can say the size of banks
balance sheet will be dependent on their ability attract funds rather than their capacity to secure
assets. A cautious study of 2009 accord shows minimal capital requirements, administration
practices and revelations to the

Too Big to Fail Essay
Too big to fail?
In this essay I will be addressing the "Too Big To Fail" (TBTF) problem in the current banking
system. I will be discussing the risks associated with this policy, and the real problems behind it. I
will then examine some solutions that have been proposed to solve the "too big to fail" problem. The
policy 'too big to fail' refers to the idea that a bank has become so large that its failure could cause a
disastrous effect to the rest of the economy, and so the government will provide assistance, in the
form of perhaps a bailout/oversee a merger, to prevent this from happening. This is to protect the
creditors and allow the bank to continue operating. If a bank does fail then this could cause a
domino effect throughout ... Show more content on Helpwriting.net ...
Market risk is the risk associated with an investors day to day investments, that are affected by
constant fluctuations in the markets. With investment banking, a banks reputation is a critical in its
success, reputational risk describes the trustworthiness of a business. A firm with a poor reputation
will not get as much business, meaning a bad reputation results in a loss in revenue. Concentration
Risk is the risk showing the spread of a banks' accounts to various debtors to whom the bank has
lent to. The Basel II accord stated that 'operational risk is the risk of loss resulting from inadequate
or failed internal processes, people and systems, or from external events'. This risk covers the very
wade basis of a company's operations, there are many different factors involved here: people,
employees actions and company processes.
Systemic Risk is the risk of the collapse of the entire financial system, Kay (2008) defined it as 'the
tendency for the failure of a financial services business to have an impact on many other businesses.'
[ 16 ] The key to solving the problem of systemic risk is by naming and taxing the TBTF firms and
this will minimize systemic risk and it will level the playing field for firms who do not have the
same guarantee of financial support as TBTF firms do.
During the recent financial crisis, in the autumn of 2008, the Lehman Brothers bank collapsed. It
was the biggest bankruptcy in history

International Case Study: ABN AMRO
Group operating profit, excluding credit market write–downs and one–off items, impairment losses
on reclassified assets, amortization of purchased intangible assets, write–down of goodwill and other
intangible assets, integration costs, restructuring costs and share of shared assets, was £80 million,
compared with a profit of £10,314 million in 2007. Losses also rose to £7,781 million, compared
with £2,387 million in 2007. The loss before tax of Group recorded of £25,038 million, compared
with a profit before tax of £8,962 million in 2007. Total income also declined to £26,875 million,
while total net interest income rises to £15,939 million, with average loans and advances to
customers up 17% and average customer deposits up 6%. Operating ... Show more content on
Helpwriting.net ...
Before the acquisition, RBS understood that ABN AMRO would receive approval for its IRB
models. But after acquisition ABN AMRO's progress towards IRB approval raised questions about
how RBS, would be able to comply with Basel II at the consolidated level so, ABN AMRO
withdraw its application and did not receive approval. ABN AMRO and DNB agreed that ABN
AMRO would continue to report capital on the basis of Basel I which included minimum ratio of
9% for tier 1 and for total capital it was 12.5%. The risk associated with the fact that ABN AMRO
had not received IRB approval yet. In 2008 there were internal FSA discussions related to RBS's
first quarter reporting approach and the approach finally by the FSA to calculate capital
requirements based on Basel IRWAs with an uplift of 30%, ABN AMRO will continued to operate
on this basis and this approach produced a higher capital figure than the Basel II IRB model–based
approach would have done. And this higher capital requirement additional strain on RBS's capital
resources and contributed to RBS's apparent fall below individual capital guidance as at end March

COMMERCIAL BANKS AND NEW CAPITAL REGULATION Essay
COMMERCIAL BANKS AND NEW CAPITAL REGULATION
MAF 202 – GROUP ASSIGNMENT
Prepared By Group 26:
Simardeep Sran – 211689444
Due: September 12, 2013
School of Accounting, Economics and Finance
Deakin University, Burwood Campus
August 30, 2013
Dear John Ovens,
Letter of Transmittal
We wish to present to you a research report regarding commercial banks and new capital regulation
prepared through collective collaboration between members of group 26.
During the first meeting, our group has made a clear goal to achieve every week till the submission
date. This required us to delegate task accordingly. To start off, Simar had prepared a ... Show more
content on Helpwriting.net ...
Additionally, the committee has proposed new capital adequacy standard, namely Basel III, to
compensate for the shortcomings of Basel II. The following are the two interrelated factors that may
have led the committee to consider a move from Basel II to Basel III.
2.1.1. Factor 1
It can be argued that the global financial crisis (GFC) shook the foundation that the global economy
was built upon. APRA (2012, p.3) indicated that the primary reason behind the cause of GFC was
disproportionate amount of leverage and '...gradual erosion of level and quality of capital base...' that
the banking sectors had accumulated. During the onset of GFC, the holdings of the banks were
insufficient to cover their losses leaving some of them insolvent. Despite the popular belief, APRA

(2012) explicitly claims that 'Australia was not immune from these impacts'. It is in fact true that
Australian banks didn't take on the similar banking activities on a big scale that the US banks
undertook, the point still remains that the global economy is interconnected and the lack of
consistency, resilience and transparency in international banking system can cause more cataclysmic
crisis' (Edey 2011). This may be why the APRA, in compliance with Basel Committee on Banking
Supervision has considered a move to Basel III with an attempt to minimise or eliminate the impact
financial crisis' having on banks.
Despite its full introduction in 2008, Basell II has been guiding investment decisions

The Regulatory Capital Is The Minimum Amount Of Capital
Q1
(a)
The regulatory capital is the minimum amount of capital that the financial regulator required the
banks or the financial institutions to hold (Elizalde & Repullo, n.d.). It is used to help to avoid to
risk and reduce the losses that we may have but can't forecast. ("Bank Regulatory Capital – Quick
Reference", 2016). The figure of the financial capital is directly set by the financial regulators. The
balance sheet capital is the equity part that we recorded on the balance sheet. The regulatory capital
is like a standard that all the financial institutions have to achieve. The financial institutions must
maintain their capital amount over the minimum amount that the financial regulator required
(Elizalde & Repullo, n.d.). However, the ... Show more content on Helpwriting.net ...
In 1988, the Basel I was published by the BCBS. It is a new method to the measure the capital and
also it focused on the credit risk and appropriate risk–weighting of assets (International convergence
of capital measurement and capital standards, 1988). Under the concept of the risk–weighted asset,
the regulators can include the riskiness of the bank's activities into the calculations of the capital
adequacy (Lange, Saunders & Millon Cornett, 2015).
"The core requirement of the Basel I were 2 capital ratios: a minimum 4% for the tier 1 capital ratio
and the Total capital ratio for 8% (Lange, Saunders & Millon Cornett, 2015)." The tier 1 capital
Ratio can be calculated by the (common equity– goodwill) / Risk–weighted assets (RWA) and the
Total capital ratio can be calculated by Total regulatory capital / Total risk adjusted assets.
Basel II
In Basel II, it improved the measurement of the risk–weighted assets. It includes the market risk, the
operational issues and the risks caused by the emergencies like the terrorisms or natural disasters
(Lange, Saunders & Millon Cornett, 2015). The Basel II is more detailed than the Basel I. In the
Basel II, it creates a new frame, the Three–pillar frame. The pillar 1 is the Minimum Capital
Requirements. It is to maintain the regulatory capital of the FI by calculating the 3 main risks, the
credit risk, market

Adequate Capital Requirements And It 's Role Of The...
Claudia Trost Professor Fligstein/GSI: Jessica Schirmer Sociology 120 1 December 2016 Adequate
Capital Requirements and It's Role in the Financial Crisis of 2008 INTRODUCTION The financial
crisis of 2007–2009 sent shock waves around the world, affecting some of the world's largest
financial institutions, along with negatively impacting millions of American citizens. Who is to
blame for such a crisis and how do we try to prevent another? Well, the cause of this crisis is not
merely that simple. This crisis was caused by a complex series of events with all actors within the
financial market to blame. However, I wanted to understand how these various actors and causes all
occurred while under the supposed watchful eye of regulators, whose role within the market is based
upon the regulation of these financial institutions to prevent crisis from occurring in the first place.
Regulators are responsible for overseeing various components within the banking industry;
however, one component that I was most interested in was capital adequacy requirements. I wanted
to understand why capital requirements were created in the first place, how they had evolved over
time and what role they played in the crisis. Lastly, I believe that capital requirements are a self–
evident prevention method in inhibiting the collapse of banks due to risky lending. Therefore, with
the creation of adequate capital requirements going forward, we could have one solution for a very
complex problem. BANKING

Issues Identification- Credit Risks
Issues identification
Credit Risk
The issues identification the type of risk involved both financial institution that related to the credit
risk that is credit is the risk of losses owing to the fact that counterparties may be unwilling or
unable to fulfil their contractual obligations. Its effect is measured by the cost of replacing cash
flows if the other party defaults. This loss encompasses the exposure ,or amount at risk, and the
recovery rate, which is the proportion paid back to the lender, usually measured in terms of 'cents on
the dollar'. Losses owing to credit risk, however , can occur before the actual default. More
generally , credit risk should be defined as the potential loss in mark–to–market value that may be
incurred owing to the occurrence of a credit event. A credit event occurs when there is a charge in
the counterparty's ability to perform its obligations. Thus changes in market's perception of default
also can be viewed as credit risk, credit risk, creating some overlap between credit risk and market
risk. Credit risk also includes sovereign risk. This occurs, for instance, when countries impose
foreign–exchange controls that make it impossible for counterparties to honour their obligations.
Beside that, credit risk of financial loss owing to counterparty failure to perform its contractual
obligations. The credit risk is far more important than market risk. Time and again, lack of
diversification of credit risk has been primary

Risk Management Cw1
RISK MANAGEMENT AND INTERNATIONAL INVESTMENT REPORT OF MARYLEBONE
BANK
BFBL606.2 Risk Management and International Finance
Tho Cam Vu
Student ID: 13486903
Date: 30th May 2014
Word Count: 3,413
Student ID: 13486903
Date: 30th May 2014
Word Count: 3,413
ABSTRACT
Marylebone Bank is an UK–based bank and had certain investments within the country and
international. Marylebone Bank is currently holdings investments in five FTSE companies in
banking industry, also holdings certain assets of cash and equity. The report sets the bank's capital
requirement with the requirement of Basel Accords in order to build up sustainable positive capital
frequently to avoid losses, liabilities and liquidity. Firstly, the report analyzes the risk ... Show more
Operational Risk 12 IV. The Capital Requirement under different Basel Accords 12 6. Under Basel
1(1988 BIS Accord) 13 7. Under Basel 1(1996 Amendment) 13 8. Under Basel 2 14 9. Under Basel
2.5 15 10. Under Basel 3 15 V. Conclusion 17 VI. References 18
I. INTRODUCTION
As a risk manager of Marylebone Bank, the primary aim is making sure the bank's capital achieve
an appropriate level to meet the obligations, be able to pay off the risk–taking and bear the expense
of unexpected losses. The Basel accord is applied as a guideline to maintain the risk rate to
minimum, avoiding financial clashes. The report examines variety of methods in order to estimate
three key risk capital charges in financial institutional management, which are market risk, credit
risk and operational risk.
II. MARKET RISK CAPITAL CHARGE ESTIMATION
There are five companies have been chosen, all of them are in the banking industry and members of
FTSE100. They are Barclays, HSBC, Lloyds Banking, The Royal Bank of Scotland and Standard
Chartered. All the historical adjusted close is collected from Yahoo! Finance. 1. Variance –

Covariance Method
The first method to be applied is Variance–Covariance method as to calculate the returns of each
company in 500 financial days, in order to calculate the covariance between the returns of two
companies respectively. Combines with the value of assets, which are

Basel Capital Accord
ROLE OF CAPITAL IN SECURING A STRONG BANKING SYSTEM – THE IMPERATIVES
OF BASEL III ACCORD Dr.T.V.Rao, M.Com.,Ph.D., CAIIB,ACIBS(UK), Professor, B.V.Raju
Insitute of Technology, Narasapur, Medak Dt., Telangana State ABSTRACT:
The stability of the Financial System largely depends on the strength and resilience of the Banking
System. Indian Banks which suffered from negative capital adequacy, negative earnings and high
NPAs in the Seventies and eighties are now on a robust footing thanks to the reforms brought about
by the Narasimham Committee I and II and on account of the strong resolve of the Govt. and the
Reserve Bank of India. It is a matter of pride that the Indian Banks have now become fully Basel II
Compliant, and that they ... Show more content on Helpwriting.net ...
of Banks with CA above 10% | 5 | 22 | 24 | | | | | TOTAL | 25 | 25 | 25 |
PRIVATE SECTOR BANKS PERIOD | 1996 | 2002 | 2008 | No. of Banks with negative CA | –– | ––
| –– | No. of Banks with CA of below 8% | 1 | –– | –– | No. of Banks with CA between 8–10% | 4 | 1 |
1 | No. of Banks with CA above 10% | 10 | 14 | 14 | | | | | TOTAL | 15 | 15 | 15 |
FOREIGN BANKS PERIOD | 1996 | 2002 | 2008 | No. of Banks with negative CA | –– | –– | –– |
No. of Banks with CA of below 8% | 1 | –– | –– | No. of Banks with CA between 8–10% | 3 | 1 | –– |
No. of Banks with CA above 10% | 5 | 8 | 9 | | | | | TOTAL | 9 | 9 | 9 |
POSITION OF SCHEDULED COMMERCIAL BANKS
PERIOD | 1996 | 2002 | 2008 | No. of Banks with negative CA | 2 | –– | –– | No. of Banks with CA of
below 8% | 6 | 1 | –– | No. of Banks with CA between 8–10% | 21 | 4 | 2 | No. of Banks with CA
above 10% | 20 | 44 | 47 | | | | | TOTAL | 49 | 49 | 49 |
The issue of lower capital adequacy had negative connotations both nationally and internationally.
The Reserve Bank of India addressed this issue on priority and convinced the Government of India
to recapitalise the ailing Public Sector Banks. This process started even before the study period, and
by 1996 the no. of Banks with negative capital adequacy are 2 viz., Indian Bank and Vijaya Bank in
the Public Sector, while there are no Banks

Case Study
S w 910N29 BASEL III: AN EVALUATION OF NEW BANKING REGULATIONS1
David Blaylock wrote this case under the supervision of David Conklin solely to provide material
for class discussion. The authors do not intend to illustrate either effective or ineffective handling of
a managerial situation. The authors may have disguised certain names and other identifying
information to protect confidentiality.
Richard Ivey School of Business Foundation prohibits any form of reproduction, storage or
transmission without its written permission. Reproduction of this material is not covered under
authorization by any reproduction rights organization. To order copies ... Show more content on
Helpwriting.net ...
Many national governments have considered the enactment of stricter regulation of financial
markets and bank liquidity. In the next few years, national and international supervisors will
implement regulatory adjustments through coordinated efforts as well as independently, causing
significant changes in the banking industry.
An internationally consistent regulatory framework is desirable for the world's banking system.
Increased global interconnection means that bank failures in one country can negatively influence
other national economies. Governments and taxpayers may suffer because of the negative
consequences from other nations' poor regulatory practices. Internationally coordinated regulation
also helps to minimize competitive differences among national banking systems. Uncoordinated
policy implementation allows some nations a competitive advantage over those with a more
restrictive regulatory framework.
Designing global bank regulation is a complex task. Negative shocks to the financial system
repeatedly uncover new problems in the banking industry, which regulators then work to correct.
International regulation has therefore become increasingly complex and restrictive. A more
complicated supervisory framework is less able to accommodate countries' financial differences.
Predicting the effects of new

Financial Crisis Evolution Of Bank Capital
TABLE OF CONTENT:
Introduction 2
Defining Bank Capital 2
Measure of Bank Capital
How Capital Absorbs Risk 2–4
Covers Credit Risk
Prevents Liquidity Problems
Manages Operational Risk
Restricts banks from taking excessive risk
Manipulation of Capital Standards 4–7
Quality of Capital Resources
Internal Rating Based (IRB) approach under Basel–II
Securitization
Credit Derivatives ... Show more content on Helpwriting.net ...
Capital in banks play an essential role of helping banks remain solvent by absorbing losses caused
due to stress conditions. In this paper, we shall analyse how capital helps banks manage their risk,
what led to banks failing during the financial crisis and what measures have been adopted to avoid
(or better manage) such situations in future.
DEFINING BANK CAPITAL
Banks' capital is defined to be the difference between the assets and liabilities of a bank.
It is the net worth of the bank or its value to investors. It is stated along the liabilities side of the
balance sheet.
Main characteristics of bank capital
No contractual repayment requirements: Unlike other liabilities, bank capital is perpetual. As long as
bank continues to be in business, it is not obliged to repay the shareholders.
Low priority in case of bankruptcy: In case of insolvency or bankruptcy, capital investors only
receive what remains after paying all the creditors. Capital generally ranks low in case of claims as
compared to most of the other claimants.
Constituents of bank capital
Tier 1 Capital also known as core capital includes permanent shareholders' equity and disclosed
reserves.
Tier 2 Capital (supplementary capital) includes undisclosed reserves, revaluation reserves, general
provisions, hybrid capital instruments and subordinate term debt subject to certain conditions.

Solvency Issues : Solvency II
Solvency II is to be implemented on the 1st January 2016. It is a three pillar based system (based on
Basel II) that follows on to try and fill the gaps from Solvency I. Solvency II is a far more risk based
approach than its predecessor and is the greatest regulatory change that insurance firms in the EU
have faced. Inevitably, Solvency II brings its own challenges and difficulties. Whether Solvency II
will lead to positive or negative changes remains a point of contention between stakeholders, but
what is clear is that it will be a much more significant transformation than Solvency I.
Since the 1970s the EU has had solvency requirements in place which require a regulatory capital to
protect against any unforeseen circumstances. EU states agreed in the 1990s that a review should be
put in place to reform and improve standards. Solvency I was the result of this review (Lloyd's, (no
date)).
Following Solvency I's implementation, it became increasingly obvious that it didn't have all of the
significant changes needed. From this Solvency II was crafted, looking to improve from Solvency I.
"It is unacceptable that the common regulatory framework for insurance in Europe in the 21st
century is not risk based and only takes account, very crudely, of one side of the balance sheet."
(Matthew Elderfield, 2013)
Solvency II looks to introduce a new set of aims including risk–sensitive capital requirements, more
sufficient and consistent standards across the EU to further single

Swot Analysis of Reliance Life Insurance Company
SECTOR OVERVIEW
1
Introduction: Banking sector The Indian Banking industry governed by the Banking Regulation
Act of India, 1949, falling into two broad classifications, non–scheduled banks and scheduled banks.
Within the commercial banks there are nationalized banks, the State Bank of India and its group
banks, regional rural banks and private sector banks (the old/ new domestic and foreign). With the
economic growth picking up pace and the investment cycle on the way to recovery, the banking
sector has witnessed a transformation in its vital role of intermediating between the demand and
supply of funds. The revived credit off take (both from the food and non food segments) and
structural reforms have paved the way for a change in the ... Show more content on Helpwriting.net
...
4
INDIAN BANKING SYSTEM
5
Indian Banking System: For the past three decades India's banking system has several outstanding
achievements to its credit. The government's regular policy for Indian bank since 1969 has paid rich
dividends with the nationalization of 14 major private banks of India. The first bank in India, though
conservative, was established in 1786. From 1786 till today, the journey of Indian Banking System
can be segregated into three distinct phases. They are as mentioned below:
Early phase from 1786 to 1969 of Indian Banks Nationalisation of Indian Banks and up to 1991
prior to Indian banking sector Reforms. New phase of Indian Banking System with the advent of
Indian Financial & Banking Sector Reforms after 1991.
Phase I During the first phase the growth was very slow and banks also experienced periodic
failures between 1913 and 1948. There were approximately 1100 banks, mostly small. To streamline
the functioning and activities of commercial banks, the Government of

6
India came up with The Banking Companies Act, 1949 which was later changed to Banking
Regulation Act 1949 as per amending Act of 1965 (Act No. 23 of 1965). Reserve Bank of India was
vested with extensive powers for the supervision of banking in India as the Central Banking
Authority. Phase II The following are the steps taken by the Government of India to Regulate
Banking Institutions in the Country:
1949: Enactment of Banking

Banking Regulation Basel II
Procyclicality in minimum regulatory capital charges for credit risk
There is a vast amount of literature available on the additional procyclicality of regulatory capital
charges in Pillar 1 of Basel II. In this section, we shall briefly visit this literature and see if any
conclusions can be drawn from this, before proceeding to the conclusion and mitigation of these
procyclical effects. The majority of the literature, as expected, focuses primarily on the IRB
approach, as this aspect of Basel II has drawn the most criticism from financial practitioners and
academics alike. The greater part of this literature has found that there is an overwhelmingly
substantial rise in procyclicality of minimum regulatory capital charges originating ... Show more
This is the biggest problem, and has to be addressed correctly once economic conditions are
conducive to do so. Within the specified Tier 1 requirement, common shares and retained earnings
should be a priority and form the predominant form of capital. To ensure the quality of this capital,
the Basel Committee should harmonize capital deductions and prudential filters (FSF & BCBS,
2009). The committee should also enhance the disclosure of the components of regulatory capital in
order to increase transparency within the system and avoid confusion in terms of the quality of
capital required.
(2) The Basel Committee should make adjustments to their framework to inhibit excessive
cyclicality of the minimum capital requirements
The Basel Committee has made a reasonable effort to mitigate this cyclicality already, by
monitoring the impact of cyclicality through data collection (via their Capital Monitoring Group).
This data is available every 6 months, and helps the committee monitor the extent to which the
capital regime reveals excessively high levels of capital cyclicality. In correspondence with this data
monitoring, the Basel Committee must review the ways in which cyclicality, arising from the Pillar
1 capital requirement calculation, can be abated. They must try and maintain the risk sensitivity of
the inputs, but also create an emphasis on dampening the effects of cyclicality on the outputs. This
way the

Process Controls And Technology Controls
Process Controls & Technology Controls Process Controls IT and Security Strategic Management,
Policy and Architecture – Architectures, policies and strategies defined to run IT services
Organizational Structure, Roles and Responsibilities and Standards for interactions between groups;
authority for security and external security related Communications  Training and Awareness –
Processes to increase visibility and knowledge of security risks Assessment and Auditing and
Processes to assess the environment, controls, policies and processes used to implement strategy
Authentication, Authorization and  Access Management – Processes and technology to verify
users' identities and control access to resources Operational Design,  Workflows and Automation –
Design and implementation of automated solutions; workflow and resource management Asset
Inventory,  Classification and Management – Processes to identify and classify assets, supporting
execution of asset class based policies Incident Readiness and Response and standards for
preparation for and response to incidents. Technology Controls  Application Design, Development
and Testing – Processes, procedures, and methodologies to ensure that new and updated applications
are appropriate, efficient and secure Systems Build and  Deployment – Systems and technologies
to assure effective, secure deployment of new and updated systems  Data Life Cycle Management
– Technology to move, Replicate and protect data Configuration

Scenario Analysis for Basel Ii Operational Risk Management
SCENARIO ANALYSIS FOR BASEL II OPERATIONAL RISK MANAGEMENT
1 Introduction: Scenario Analysis for Potential Catastrophic Losses 1
2 Addressing Operational Risk 3
3 Scenario Analysis in a Risk Measurement Framework 5
4 Scenario Analysis in a Risk Management Framework 6
5 Achieving Risk Measurement and Management 6
6 Conclusion: Benefiting from Scenario Analysis 7
1 Introduction: Scenario Analysis for Potential Catastrophic Losses "Are you saying that you want
us to figure out how to lose R50 million?" asked the risk manager for the fund technology and
services unit of a large bank. "Obviously, you have no idea how our funds are managed or what
extreme measures we take to make sure that no money is lost."
With a hint of pride in his voice, ... Show more content on Helpwriting.net ...
Financial institutions have always recognized the importance of safeguarding customer data.
However, the impact of data compromise has increased substantially as identities have migrated
from visual to digital. Scenarios like the ones mentioned above have become significant due to
never–before–seen levels of regulatory fines and litigation expenses.
The New Basel Capital Accord (Basel II) requires financial institutions to develop a comprehensive
loss distribution so that they can more accurately estimate their risk profile and reserve
requirements. In particular, Basel II adds operational risk to the traditional categories of credit risk
and market risk that are currently used to estimate capital requirements.
2 Addressing Operational Risk
By including operational risk in the calculation metrics for the New Capital Accord, Basel II has
recognized that credit and market risks are not the only exposures that a bank may face. The
complexity of calculating operational risk is, however, compounded by the fact that the internal loss
history of a financial institution does not adequately account for all the operational risks and
exposures faced by that institution.
To augment internal experiential data, Basel II recommends that financial institutions look to
external events and scenarios. External loss data cannot be readily used in capital calculations due to
the inherent shortcomings of the reliability of

Economics Of Banking Chapter Summary
H.Keiding: Economics of Banking (Prel.version:September 2013) Chapter 18, page 1 Chapter 18
Capital Regulation and The Basel Accords 1. Introduction: why capital regulation? 2. Effects of
capital regulation 2.2. A model where banks have equity in excess of regulatory demand. There is
some empirical evidence that banks choose a composition of funding where the share of equity is
larger than what is demanded by regulators. Below we consider a simple model of largely
competitive financial markets, due to Allen, Carletti and Marquez (2011), where this is the case. We
consider a one–period economy with firms having access to a risky investment and in need of
financing, and banks that lend to the investors and monitor them. An investment ... Show more
If this is a result of market forces, it must be a market where all bargaining power is left with the
borrowers, none with the banks. Therefore, it may be questioned whether the result can be seen as a
decision by banks to hold more than the minimal capital required. If instead we introduce a
regulator, determining k so as to maximize a social welfare function defined as we get that rL ≥ 2 −
k, and inserting this into (1) we get that k ≥ 1 1 B + Π = q(y − rL ) + q(rL − (1 − k)rD ) − krE − q2 =
q(y − (1 − k)rD ) − krE − q2 , 2 2 while otherwise everything is as before, then for large enough y
(namely y ≥ 2, the capital ratio k may be chosen as 0, since the banks' gain with rE = 2 is large
enough to give incentives for q = 1. If y < 2, the capital ratio must be positive, whereas q may be
less than 1. H.Keiding: Economics of Banking (Prel.version:September 2013) Chapter 18, page 3
2.3. A model where capital regulation may increase risk. To see that capital regulation may work in
ways that run counter to intuition, we look at a simple model proposed by Hakenes and Schnabel
(2010). It is in many respects close to the one which we used in the discussion of competition and
risk (Chapter 11). We assume that there are N banks which are financed either by deposits D j or by
equity E j , j = 1, . . . , N. The banks compete for depositors and for loans. Borrowers are
entrepreneurs, who may choose risky projects, all of equal size 1, characterized

The Implementation Of The Basel Accords
Facing the problems posed by an unstable global financing market, the BCBS set the following
intertwined goals: to develop a comprehensive set of standards on capital flows, to implement those
standards in the absence of legitimate international treaties or law, and for that to happen, to
maximize their own enforcement power through guidance and supervision. It is in the interest of
every nation to maintain its own competitiveness while refraining from harming the stability of the
global financial system. However, these two goals are not always compatible with one another.
The creation of the Basel Accords was the result of bilateral negotiations between Britain and the
U.S. in the early 1980s, which were later expanded to involve the G10 nations (France, Germany,
Belgium, Italy, Japan, the Netherlands, Sweden, the United Kingdom, the United States and
Canada). Basel I was born out of those negotiations and was viewed as the first international attempt
to govern financial globalization and to re–establish "the infrastructure of the infrastructure" of
world order. Since its implementation, Basel I has been now adopted into the national finance
system, and become domestic law, of more than 100 countries. It is considered "one of the most
successful international regulatory initiatives ever attempted." In other words, the standards set forth
in Basel I have taken the position of a set of global standard. Its successor–Basel II–was not as
fortunate. The second, more

The Global Financial Crisis
The global financial crisis has raised many concerns for the need to restructure the approach of risk
and regulation in the financial sector (KPMG 2011). Figure. 4 has shown the structures of Basel III.
It aims to increase the capital and liquidity of banks and therefore maintaining the stability in
banking sector with full effect in 2019 (Banks For International Settlements 2011).
EUROPE – Preparedness
On 26 June of 2013, Capital requirement regulation (CRR) and directive(CRD) has been adopted for
Basel III in Europe. Basel III permits the capital buffer increase gradually to 2.5% in 2019 (Banks
For International Settlements 2011). There is minor deviation in adapting this approach in Europe.
Given that small institution may adapt Basel ... Show more content on Helpwriting.net ...
Secondly, banks will have a more accurate estimate of liquidity by doing "cash–flow forecasts and
portfolio analysis"(Philipp et al. 2010, p. 16). By having a better understanding, banks can then
adjust their asset to "adjust their short–term asset and liability structure"(Philipp et al. 2010, p. 16)
to ensure they can fulfill the new capital requirement. More specifically, taking BNP Paribas as an
example, it cuts dividend to increase retained earning to boost CET1 capital and sell impair Greek
sovereign debt to reduce risk weighted asset (Yuting et al. 2012).
From our point of view, banks are all computing different strategies regarding on their own
company–specific risk. However, it is common for banks to cut dividends in order to meet the CET1
requirement (Yuting et al. 2012), which deteriorate shareholders' interest.
Potential Challenges: (1) Capital stress (2) Funding stress
For simpler explanation, four banks from Europe are selected namely, BNP Paribas, Banco
Santander, Deutsche Bank and Unicredit for comparison. The European Banking Authority (EBA)
requires banks to reach a Common Equity Tier 1 ratio of 9% by the end of June 2012"
(P.15HECparis). This period is shorter than the one set by Basel III. This imposes extra stress on
banks to increase their liquidity within a short time. Furthermore, EBA has also decided a Stress
Test in 2011 based on the RWAs, CET1 and buffer. Compared to other banks, Banco Santander in
Spain would have the largest shortfall of

The Financial System Inquiry ( Fsi )
The Financial System Inquiry (FSI) acts as a model for achieving a resilient and efficient financial
system, contributing to Australia's economic growth. The Capital requirements implemented
according to the FSI has potential impacts on Australian banking system:
1. Increase in borrowing cost/ interest rate
The recommendation that banks in Australia are required to hold additional capital would lead to an
increase in the borrowing costs. Furthermore, the requirement of capital held in banks must be of a
higher quality makes capital more expensive (FSI 2013). A 1% point increase in capital
requirements is estimated to raise average interest on loan by less than 10 basis points, assuming
that full cost is passed on to consumers (Mitchell 2013). In relation to that, Australia banks have to
come up with repricing strategies to pass on the cost to consumers. However, the actual change in
lending interest rates would be lower in a competitive market because RBA has can lower the cash
rates in critical conditions. An increase in interest rate would lower real GDP by less than 0.1%
points (Mitchell 2013).
2. Foregone opportunity cost
The higher capital requirements would imply that banks need to use more capital funding and place
larger constraints on banks' sources and usage of funding (The banking system 2013). This would
limit or forego banks opportunity to finance new projects (FSI 2013).
3. Reduced risk premium
On the bright side, the tighter capital regulations would reduce

Pros And Cons Of Basel III
Introduction After our throughout research on Basel III regulation and it's pros and cons, our group
came to the conclusion that Basel III indeed made the banking system to become more stable and
safe compared to the time where there is no Basel III regulation. Before we begin to defense our
standpoint, we would like to have a short review of what exactly Basel III is.
Basel III is a regulatory reform measures to improve the banking regulation, supervision and risk
management. Basel III was published in 2009 and mainly because of widespread of credit crisis of
global banking system. Therefore, the banks must maintain sufficient capital and proper leverage at
any point in time. We also know that Basel III is implemented right after Basel I and II, its main
changes are to enhance the stability of banking system when facing financial crisis and economic
downturn. Apart from that, the content of banks' risk management and transparency are also
strengthened. The volatility of banking system can thus be reduced through strictly enforced Basel
III standard and requirements.
The benefits of Basel III The Basel III can reduce the probability and severity of future financial
crisis through stronger capital requirement; lower leverage ... Show more content on Helpwriting.net
...
The wholesale and capital market funding are more sensitive to credit and price risk. They merely
depend on local funding instead of international ones. Off–balance sheet activities are also given
attentions such as margin call, default insurance and options. These items are often neglected
previously however; it does count to the bank liquidity account. Interbank transactions are upgraded
to electronic transfer which is instant and much more reliable. These actions can minimize the
liquidity risk of a bank and thus the default

Banking : Theory And Practice
Banking: Theory & Practice FINA3304: 2015 Group Assignment Task 1: Basel III – Capital
adequacy
Basel III consists of a comprehensive set of reform measures intended to improve the regulation,
supervision and risk management of the banking sector (APRA 2013). Being developed mainly in
response to the credit crisis of 2007, it requires banks to maintain adequate leverage ratios and meet
certain capital requirements. Basel III builds on the basis of previous Basel I and Basel II and is
aimed at improving the banking sector's ability to deal with financial stress and turmoil, strengthen
the banking sectors transparency and improve risk management (Investopedia 2015).
In Australia, the Australian Prudential Regulatory Authority ... Show more content on
Helpwriting.net ...
Since 2010 APRA has been involved in the active implementation of a series of updates to its
prudential standards to ensure consistency with the capital requirements of the Basel III framework.
In September 2012 APRA published a ultimate set of prudential standards that address the foremost
elements of the Basel III capital reforms in Australia. Subsequently, in November 2012 they also
issued a package of final actions, including requirements for counterparty credit risk, which
completed APRA's implementation of the Basel III capital reforms for ADIs (McCoach 2014).
Graph 1B (see appendix) shows how the minimum Tier 1 capital requirement have been increased,
from 4 per cent to 6 per cent of risk–weighted assets, which will take effect once fully phased in.
APRA required ADIs to meet its new capital requirements for CET1 capital and Tier 1 capital at the
beginning of 2013, which was two years ahead of the phase–in deadline, and also required ADI's to
adhere to the full capital conservation buffer requirement at the start of 2016 as shown in Graph 1B
(Reserve Bank of Australia 2013). Australia has implemented certain aspects of Basel III ahead of
the scheduled timeline to ensure that banks and other ADI's have a significant amount of time to
prepare for implementation.
The predominant goal of the

Key Supervisory Issues And Improvement Of Banking Regulation
The financial instability of the past few years has provided important evidence that can be used for
the detection of dangerous flaws in the international banking system. After the financial crisis of
2008– 2009, the Basel Committee on Banking Supervision made significant steps in improving
understanding the key supervisory issues and improvement of banking regulation worldwide.
Subsequently, new standards were created for banking system regulation, which represents upgraded
capital requirements, liquidity norms, and additional monitoring tools for banking supervision and
regulation. These standards were first established in 2009 by the BCBS though some of the
Committee's proposals remain currently open for discussion.
The resultant ... Show more content on Helpwriting.net ...
This leads to increase from 4% (Basel II) to 8% of the risk–weighted assets in requirements
regarding the Tier 1 Capital (which includes only common shares and undistributed profit). The
second important inclusion of Basel III relates to the size of balance sheets which banks should
strive to reduce: "leverage ratio" puts a limit on a list of activities a bank can develop compared to
its capital. The minimum capital adequacy ratio that is required to be maintained by a bank is 8%
(without the capital conservation buffer), which must reach 10,5% of the total assets. The third basic
element of Basel III relates to liquidity. To provide a bank for equilibrium between loans and
deposits Basel III has developed specific regulation which initiates with risk assessment through the
stress test. Basel III compels banks to have sufficient liquidity available during a period of 30 days
of "stressed" conditions. Under these circumstances only half serves to reimburse the bank and the
bank is expected to inject the other 50% in the economy by granting new loans. Thus, loans with a
maturity of 50% leave the bank once more. For deposits, Basel III states that the first group,
individuals, and SMEs, leave the bank at the rate of 5% to 10% during the stress test. While for bank
deposits, it is 100%. For corporates clients

Basel Norms

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