IntroductionThe financial crisis in 2008-2009 affected the banking sector tremendously as there were bank failures and the incapability of the banks to deliver quality service and maintain transparency. The number of bank failures especially due to liquidity has made the world governing bodies to look towards revising the capital adequacy requirements. This led to a change in capital requirements which has been provided in Basel III and the G20 summit increased pressure on banks to accept it. The different core issues pertaining to Basel III are still being discusses but it looks mainly towards improving the attention towards implementation by making policies and strategies that ensures better compliance.
The fact that the deadline to incorporate the changes pertaining to compliance has been kept at 2019 it is imperative that world bodies looks towards achieving the capital and liquidity requirements before that for better compliance and monitoring of the activities. Objective of the ReportThis report looks to analyze the factors which have resulted in the development of Basel III and the differences it has in comparison to Basel II. The paper further looks into different reasons which have made the banking regulations to undergo changes and the changes and implications it will have for banks.
This will thereby help to understand the manner in which the banking sector has evolved and the manner in which transparency, compliances and liquidity will be looked into. This will thereby help to understand the manner in which the working of the banking sector will improve and help to strengthen the banking regulations. Basel System HistoricallyThe Basel system started in 1992 after discussions which went on from 1988.
The Basel I came into operation in 1992 which required that banks ensure sufficient capital so that the losses could be absorbed and to develop a field where they competed internationally but avoided conflicts. This was corrected by developing Basel II norms which looked towards filling the regulatory arbitrage gap that existed. According to the Basel I requirements banks controlled their capital requirements by shifting balance sheet items and securitizing assets by shifting them off the balance sheet which affected the capital requirements and risk taking ability of the banks.
This resulted in the simplification of Basel II norms where banks were allowed mortgages to 30% so that risk weight age reduces from 50% to 30% (Gordy, 2003). Despite developing different pillars which looked towards ensuring that the capital adequacy requirements improved and banks were able to maintain more liquidity the actual situation didn’t turn out the same. This resulted in the development of Basel III norms which would help to boost the capital that banks hold and will allow increase trading there ensuring better liquidity and maintenance of capital adequacy.
Factors that evolved Basel III normsThe financial crisis witnessed in the year 2007 was one of the prime reasons which led towards the development of the Basel III norms. The financial crisis clearly highlighted that the several gaps which existed in the banking sector resulted in many countries have excess on and off the balance sheet leverage which resulted in bank failures and created a crisis. This brought forward the need to revise the regulations of the banking sector and the Central bank and the government had their role to be played.
A special emphasis which also required urgent development of the banking sector reforms was that the crisis resulted in the decline in the value of mortgage based securities, which led towards defaults leading to a problem associated with liquidity and solvency of the banking sector. This resulted in a downward spiral of asset prices creating problems of liquidity and solvency. Banks to maintain their capital requirements and in situation of falling assets prices it created a liquidity crunch and highlighted the gaps that existed in the Basel II norms which had to be fixed for ensuring better banking sectors reforms (Kane, 2006).