Essays on The Implications of Basel III and More Recent Regulatory Initiatives on the Banking Sector in the UK Case Study

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The paper 'The Implications of Basel III and More Recent Regulatory Initiatives on the Banking Sector in the UK" is a good example of a finance and accounting case study.   In today’ s economy, strategic business decisions must be supported by a thorough understanding of the firm’ s risk environment as well as the linkage to financial performance. Therefore, senior management in the financial sector needs to consider their institution’ s capital budgeting and the risk management decisions in a single approach. This will eliminate the practice of taking them as separate and distinct activities.

This is a clear indication that risk management activities must be an integral part of the general business strategy, and thus need to be ultimately aligned with the institution’ s financing decisions. Cash Flow at Risk (CFaR) is a powerful and more versatile management tool that can help the top executives to make a comprehensive strategic, financial and risk integration within a uniform decision framework (Harrington & Niehaus 2003). On September 2010, the Basel Committee for Banking Supervision (BCBS) approved the annexe that it had previously issued, specifying more on the details for capital requirements.

This particularly concerned the target ratios as well as the transition periods through which banks are required to adapt to the new financial regulations. The outcomes of the discussion have now been supported at the recently-concluded G20 meeting in Seoul. Therefore, Basel III, as the universally accepted new rules is fundamentally complete. The new regulations are expected to make the European banking system safer by ensuring that the flaws reflected in the financial crisis are redressed. Therefore, improving the quality as well as the depth of capital and a strong focus on liquidity management is meant to spur banks to develop their fundamental risk-management capabilities.

This provides a crucial implication that if banks fundamentally revamp their understanding of the risks associated with their banking services, a situation commonly known as a new risk paradigm, there will be significant performance improvement for their business as well as consumers, investors, and governments. As a result, banks are already creating their capital, funding stocks and undertaking risk from their books through various ways in response to the new regulations.

The three sets of actions considered as important guidelines to implement the current Basel III and other regulations include improved capital and liquidity management, restructuring of the balance sheet, and the capability to adjust business-models (Basel Committee on Banking Supervision 2010). Assessing the implications of Basel III rules on European banks The Base III rules text were issued by the Basel Committee issued, indicates the essential aspects of the international regulatory standards. Banks are required to adhere to such standards to enhance their capital adequacy and liquidity as agreed by the Financial Governors and Heads of Supervision.

The rules cover both the micro and macro-prudential elements of the Basel III framework that sets out better and high-quality capital, improved risk coverage, the integration of a leverage ratio as a baseline to determine the risk-based requirement, measures to endorse the increase of capital to be drawn down in times of stress as well as the introduction of global liquidity standards. The new regulations of the Basel Committee framework on bank capital and liquidity increases the resilience of the international banking system not only in the European banks but also in financial institutions across the world.

This is achieved by raising the quality and quantity as well as global consistency of the bank capital and liquidity, restrict the increase of financial control and maturity mismatches. Additionally, there is an introduction of capital buffers above the required or minimum to be drawn upon during bad times (Hanson, Kashyap & Stein 2011).

Bibliography

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Abiad, A, Leigh, D & Mody, A, 2009, Financial integration, capital mobility, and income convergence, Economic Policy, 24(4), 241-305.

Basel Committee on Banking Supervision, 2010, Guidance for national authorities operating the countercyclical capital buffer, Retrieved 1 January, 2012 from,

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Committee on the Global Financial System, 2010, Funding patterns and liquidity management of internationally active banks, CGFS Papers no. 39, Basel: BIS.

Harrington, S.E. & Niehaus, G.R., 2003, Risk Management & Insurance (2nd Ed.), Singapore, McGraw Hill.

Hanson, S, Kashyap, A & Stein, J., 2011, A macro-prudential approach to financial regulation, Journal of Economic Perspectives, 25(1), 3-25.

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