EECS 1541 Lecture Notes - Lecture 29: Basel Iii
23 Jun 2018
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EECS 1541 Lecture 29 Notes
Introduction
Impact of the Credit Crisis
The crisis also illustrated how financial problems at some banks could spread to other
banks and how financial problems in the banking system could paralyze economies.
A global committee of bank supervisors discussed solutions that would enhance the
safety of the global banking system with the aim of preventing another financial crisis.
This led to a global agreement among bank regulators in September 2010 that is
informally referred to as ͞Basel III.͟
The accord called for estimating risk-weighted assets with new methods that would
increase the level of risk-weighted assets and thus require banks to maintain higher
levels of capital.
It also required that capital be at least 6% of total risk-weighted assets.
Basel III also recommended that by 2016 banks establish an extra layer of capital, a
capital conservation buffer, amounting to at least 2.5 percent of risk-weighted assets.
Banks that do not maintain this buffer could be restricted from making dividend
payments, repurchasing stock, or granting bonuses to executives.
This accord also focused on ensuring that banks maintain a sufficient level of liquid
assets that can be easily sold if access to cash is needed.
The liquidity provisions are controversial because severe restrictions on liquidity could
force a bank to hold assets that earn less than its cost of funds.
As a consequence, banks could be exposed to higher default risk.
All of the Basel III provisions are meant to be phased in.
Some provisions may not take effect until 2019, and other provisions have not yet been
finalized.
For example, there is still debate concerning whether the provisions should apply to all
banks or only to large banks.
Document Summary
The crisis also illustrated how financial problems at some banks could spread to other banks and how financial problems in the banking system could paralyze economies. A global committee of bank supervisors discussed solutions that would enhance the safety of the global banking system with the aim of preventing another financial crisis. This accord also focused on ensuring that banks maintain a sufficient level of liquid assets that can be easily sold if access to cash is needed. Some provisions may not take effect until 2019, and other provisions have not yet been finalized. For example, there is still debate concerning whether the provisions should apply to all banks or only to large banks. In 2008, the united states experienced a credit crisis that affected the international credit market. Global committee of bank supervisors discussed solutions that would enhance the safety of the global banking system with the aim of preventing another financial crisis.
