The Basel III rules : promoting a more resilient banking sector

Abstract

Four years after the outbreak of the worst global financial crisis, the world is experiencing a fundamental reform of the regulatory and supervisory framework. The purpose of this study is to describe the Basel III regulatory framework, endorsed last November 2011 by the Group of Twenty economies. This framework is to be implemented over a six-year period starting from 2013 and will eventually replace the current regulatory framework. The research shows how the new regulatory rules are intended to help prevent the recurrence of another financial catastrophe. A study to evaluate the potential impact of Basel III on the banking sector is also addressed. The thesis details the new capital, liquidity and leverage standards introduced under Basel III to help increase the resiliency of the international banking system to both internal and external shocks. Macro-prudential measures, including the introduction of a countercyclical buffer, are also explained. Graphical illustrations are used to help assess how these rules are expected to hit the American and the European banking systems. The study reveals that the largest American banks do already conform with the minimum Tier 1 capital ratio of 6%. Alternatively, the European banking picture is more mixed and is expected to be hit the most by the new rules. While German banks are seen to raise new capital, Swiss and British regulators have been calling for higher capital ratios. However, given the long transition period, the actual impact of the new Basel III rules still has to be seen and further calibration is needed. Thus, the principal conclusion is that Basel III is a big step forward, but still a long way to go.