What is it about?

Although there has been considerable focus on minimum capital requirements since Basel II - namely improvements aimed at enhancing the quality and quantity of capital, focus on Systemic Globally Relevant Institutions, there are still many concerns - particularly in respect of transparency of the derivative markets, SFTs, shadow banking activities - as well as the rising crypto asset markets. Conservation buffers , as well as counter cyclical buffers were introduced after Basel II. All in response to a prevalent flaw in Basel II - namely, the need to address pro cyclicality.

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Why is it important?

Addressing pro cyclicality was considered necessary because an important lesson from the GFC was that even though many banks had met stipulated capital requirements, other issues relating to liquidity and leverage ratios, had to be addressed. This was illustrated during the Northern Rock Crisis.

Perspectives

Another lesson drawn from the Northern Rock Crisis, was that the tripartite relationship which existed between the then financial services regulator, the Financial Services Authority (FSA), the Bank of England, and the Treasury did not permit or facilitate the required level of timely, coordinating exchange and relationship which enabled the Bank of England to effectively execute its traditional function as Lender of Last Resort. Following the introduction of the Special Resolution Regime (SRR) in 2009, other developments paved way for the revision of the tripartite relationship, change in structure and system of relation - with bank supervision now being undertaken by the Financial Policy Committee (FPC), Prudential Regulation Authority (PRA), and the Financial Conduct Authority (FCA). Under the Bank of England Act 1998, the Bank of England had transferred bank supervision to the FSA in 1998 (officially) - even though the announcement had been made by the incoming Labour government to transfer financial regulation to the FSA in October 1997. Hence even though the Bank of England had been engaged (to an extent) in bank regulation, it was not primarily responsible for financial regulation - but rather, more engaged in monetary policy setting matters.

Prof Marianne Ojo
Northwestern University

Read the Original

This page is a summary of: Basel II and the Capital Requirements Directive: Responding to the 2008/09 Financial Crisis, SSRN Electronic Journal, January 2009, Elsevier,
DOI: 10.2139/ssrn.1475189.
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