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Capital Requirements of Basel III Essay


Basel III rules were introduced after the 2008 global financial crises that demonstrated that Basel II is too flexible and cannot secure the global economy and financial sector from instability. The renovated requirements are tighter and it is believed that they will be more effective. It is imperative to note that Basel III is made up of two groups of requirements – capital requirements and funding and liquidity requirements (Breeschoten 2015).

The first group centers on liquidity and funding of banks determining that they should have liquid assets of high quality that would help to withstand thirty days-long stressful situations in the financial sector. As for the capital requirements, this group focuses on guaranteeing the quality of capital, its conservation, and the establishment of countercyclical buffer necessary for minimizing financial risks (Basel Committee on Banking Supervision Reforms n.d.). In general, Basel III recommended to increase the quantity of capital and improve its quality so that in case of economic turbulence there is a reserve for avoiding catastrophe.

The introduction of Basel III capital requirements had a robust influence on both real economy and global financial sector. First of all, increased requirements are helpful for making banks more stable. It means that they obtain better ability to absorb losses. In case of unexpected economic developments, this capacity is useful for preserving instability within one financial institution and avoiding spillover affect that led to the 2008 global financial crisis. Generally speaking, the implementation of Basel III capital requirements leads to consolidation of the financial sector and, as a result, economy as the whole.

Moreover, because banks are required to increase the volume of liquid assets, it eliminates the necessity of raising additional capital over years. It as well means that banks become more powerful and their activities are consolidated. In addition, these requirements minimize the risks of undesirable bubbles in the financial sector that might influence welfare of states and the global economy (International Monetary Fund 2013).

It should be noted that even though it would be difficult for the banks to follow these requirements and upgrade their capital funds, the weakest banks would cease operating on the market. It means that only stable and powerful institutions will remain functioning in the financial sector that would guarantee its stability and security (KPMG 2011).

As for the influence of Basel III capital requirement on the real economy, it should be viewed from the perspective of banks operation. Because banks are forced to increase the volume of liquid assets, the resources for providing the real economy with loans would drain (Ennew & Waite 2013). It means that Basel III capital requirements will be connected with the decrease of manufacturing rates and gross domestic product in the short run.

Nevertheless, the negative influence of new requirements will disappear over time with the establishment of new equity rates and accumulating enough funds for financing the needs of the real economy (Wandhofer 2014).

To sum up, the impact of Basel III capital requirements would be positive on both financial sector and the real economy. However, positive shifts will occur in the longer run once banks accumulate enough liquid assets to meet the new requirements and form new reserves for financing the needs of the real economy. At the same time, they might stimulate investment activities of the private sector, as Basel III requirement will shape the financial gap in the market that should be filled.

Nevertheless, it is still imperative to note that risks related to instability in the financial sector and spillover effects are higher than those connected to temporary decreases of the gross domestic products (Scott 2016). So, Basel III, once appropriately implemented, is the guarantee of stability and security of the global economy.

Reasons for Regulating Banks and the Financial Sector

There are several significant reasons for justifying strict regulation of banks and the financial sector. First of all, it is paramount to mention that economy a network of linkages between all operating actors and changes or instability in one sector inevitably entails changes in other segments (Meester 2014). This statement is the fundamental reason for regulating separate sectors of economy.

Moreover, it is needed in order to minimize the risks of banking panics, i.e. unexpected fluctuations in the banking sector that leads to bankruptcy and inability to cope with deposit withdrawal panics. In addition, regulation of banks and financial sector is required for guaranteeing security and stability of domestic and global economic that can be influenced by bank failure and disappearance of money supply connected to similar occurrences.

One more reason for justifying strict regulations is the opportunity to protect depositors who will become first victims in case of bank failures. Furthermore, this strategy is beneficial for decreasing rates of fraudulent activities in the financial sector. The focus is made on both money laundering practices and stimulating the injections of ill-gained money into domestic economies that have a negative influence on country image and welfare of citizens. Finally, regulation of banks and financial sector is necessary for controlling macroeconomic activities within a country, i.e. the volume of money supply, level of deposit ratios, and achieving strategic macroeconomic objectives (Andoh 2014).

References

Andoh, S K 2014, Essentials of money, banking, and financial institutions: with applications to the developing world, Lexington Books, New York, New York.

. n.d., Basel III. Web.

Breeschoten, D 2015, Treasury and financial risk management, Corpus Education, Melbourne, Australia.

Ennew, C & Waite, N 2013, Financial services marketing: an international guide to principles and practice, Routledge, New York, New York.

International Monetary Fund 2013, Brazil: Staff Report for the 2013 Article IV Consultation, International Monetary Fund, Washington, District Columbia.

KPMG 2011, Basel III: issues and implications. Web.

Meester, B D 2014, Liberalization of trade in banking sector: an international and European perspective, Cambridge University Press, Cambridge, England.

Scott, H S 2016, Connectedness and contagion: protecting the financial system from panics, The MIT Press, London, England.

Wandhofer, R 2014, Transaction banking and the impact of regulatory change, Palgrave Macmillan, London, England.

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IvyPanda. (2020, October 11). Capital Requirements of Basel III. Retrieved from https://ivypanda.com/essays/capital-requirements-of-basel-iii/

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IvyPanda. (2020) 'Capital Requirements of Basel III'. 11 October.

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