Impact/effects of Basel III capital requirements Harvard Case Solution & Analysis

Abstract

This paper explores new banking regulatory practices published by the Basel Committee on Banking Supervision (BCBS) on 2010, through documents that were written in response to the international crisis environment that was established in 2008. The proposed changes, among other recommendations, are mainly focused on increasing capital requirements, the quest for a higher quality regulatory capital, the introduction of leverage and liquidity ratios, capital conservation buffers and new monitoring systems.

Introduction

On July 12, 2010 the Basel Committee had validated the additions which had been issued in 26 July. Moreover, further specific details were also added such as capital requirement, particular target ratios and the limited time period in which banks are liable to adapt new regulations announced by committee. The results generated had been discussed and concluded in G20 summit held at Seoul, along with the exceptions of upcoming treatment for specific systematic institutions.

The new rules introduced in Basel III are aspiring to make the banking system safer by addressing all the issues and flaws which were visible in the financial crises of 2008. By improving the quality of capital with its depth and the focus on liquidity management encourages to improve risk management of banks and its capabilities to resolve those risks. The reasons of developing such regulations is that if banks reached to a new risk paradigm that is understanding of new risks, this would be beneficial for the business along with investors, consumers and the governments.
Impact effects of Basel III capital requirements Harvard Case Solution & Analysis

The main focus of Basel III regulations is on capital and funding. Therefore, new capital target ratios are specified. Such as the core requirement of Tier 1 is of 7%. However, the broader requirement for allover Tier 1 capital is set to be at 8.5%. The regulations under Basel III have also set new rules for the purpose of short term funding. In addition, these new standards also sketch the requirements for long term funding. The impact of introduction of new rules is much significant. Apart from any mitigating actions, the impact of European and US capital shortfall can be estimated at €1.7 trillion, along with the short term liquidity shortfall of €1.9 trillion. In addition, long term funding ratios are being calculated and currently, it has been defined that long term funding ratios would have significant impact which would be creating shortfall of 2.3 trillion in Europe only. Similarly, long term funding would also be impacting on United States, with the estimated shortfall of 2.2 trillion.................

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