Critical Review Of Basel III: An Evaluation Of New Banking Regulations

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[Critical Review of Basel III: An Evaluation of New Banking Regulations]



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Table of Contents




Basel Committee on Banking Supervision2

Regulatory Motivations and Outcomes4

Pro-cyclicality and its Issues6

A Case of Bad Timing7

The Basel Committee Rethink8

Recovery for Banks Could Be More Difficult under New Rules9

The Future Regulation of Securitization10

The Shape of Regulation to Come11

Banking System Risk and Regulation12

Regulatory Efficiency and Effectiveness21

Bank Capital Regulation and Global Economic Growth23



Basel Committee on Banking Supervision

The Basel Committee on Banking Regulation and Supervisory Practices (Basel Committee), founded in 1974 by the central bankers from G10 countries, serves as a forum for banking supervisory matters. Current members of the Basel Committee come from Belgium, Canada, France, Germany, Italy, Japan, Luxembourg, the Netherlands, Spain, Sweden, Switzerland, the United Kingdom, and the United States. The committee's secretariat is situated at the Bank for International Settlements in Basel, Switzerland, and consists of 15 people who are mostly professional supervisors on temporary assignment from their home institutions (James, 2002, 520).

The committee does not possess any formal authority, and its developments do not have legal force. Rather, it attempts to formulate broad guidelines and recommends codes of best practices that deal with issues such as capital adequacy, the functioning of payment and settlement systems, and other aspects of banking supervision. Central banks then incorporate these guidelines and practices into national regulations of their respective countries.

The committee includes four main subcommittees, around which the work is organized: the Accord Implementation Group, the Policy Development Group, the Accounting Task Force, and the International Liaison Group. The latter provides a platform for nonmember countries to contribute to the committee's current and new initiatives. The committee circulates the papers in which the results of its research are presented to banking authorities around the world.

The Basel Committee aims to encourage convergence toward common standards and approaches in banking supervision. The need for such unification comes from the increasingly global nature of financial markets and a strikingly broad scale of the recent financial crises. Over the years, the committee has implemented various guidelines on the amount and substance of banking supervision. In 1988 the committee adopted a package of standards related to capital adequacy—the so-called Basel Capital Accord, or Basel I. Basel I has become an important international standard in the field of banking supervision.

In 1999 the committee proposed a New Capital Adequacy Framework, also known as Basel II. It is meant to replace the 1988 document. Basel III Framework emphasizes an incentive-based approach toward financial regulation in contrast to the rule-based regulation that was in place ...
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