What is it about?
2010 heralded the introduction of liquidity ratios, namely the Liquidity Coverage Ratio (LCR) and the Net Stable Funding Ratio (NSFR) - along with the leverage ratios - in response to addressing issues partly associated with pro cyclical effects - a shortcoming of its predecessor, Basel II. Further, the quality and quantity of minimum capital levels were raised - along with the introduction of conservative buffers and counter cyclical buffers - also potentially raising limits for GSIBs.
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Why is it important?
Excessive deleveraging processes took place during the GFC - even where banking institutions were considered to be compliant with minimum capital requirements - and the evolved financial environment, coupled with complex financial instruments, as well as non traditional channels of asset transmission facilitated the processes whereby excessive leverage were channelled through such instruments - as well as through the use of offshore and off balance sheet instruments. The leverage ratios, subsequently introduced supplementary leverage ratios and the Enhanced Supplementary Leverage Ratios were introduced, to address in part, the use of Off Balance Sheet Instruments. Further, Special Purpose Vehicles , Securities Financing Transactions (SFTs) were addressed (or supposed to be addressed) by the leverage ratios.
Perspectives
The recently introduced leverage ratios, enhanced supplementary leverage ratios - as well as the liquidity standards have gone a long way to addressing many problems associated with maturity transformations, excessive deleveraging short term funding and SFTs. However shadow banking remains an area which constitutes continued problems - as sophisticated non accounted for off balance sheet instruments still avail - and moreover the increasing popularity of unregulated crypto assets will present future challenges for regulators - particularly where such assets are backed by governments and no central form of regulation exists to regulate this growing (and potential volatile and systemic) industry. This also implies increased roles for Pillar 2 and 3 of the Basel Capital adequacy framework - namely: supervisory review and market discipline (enhanced disclosure requirements) to complement the minimum capital requirements (Pillar One).
Prof Marianne Ojo
Northwestern University
Read the Original
This page is a summary of: Basel III and Responding to the Recent Financial Crisis: Progress Made by the Basel Committee in Relation to the Need for Increased Bank Capital and Increased Quality of Loss Absorbing Capital, SSRN Electronic Journal, January 2010, Elsevier,
DOI: 10.2139/ssrn.2822157.
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Resources
Basel III and Responding to the Recent Financial Crisis: Progress Made by the Basel Committee in Relation to the Need for Increased Bank Capital and Increased Quality of Loss Absorbing Capital
The recently introduced leverage ratios, enhanced supplementary leverage ratios - as well as the liquidity standards have gone a long way to addressing many problems associated with maturity transformations, excessive deleveraging short term funding and SFTs. However shadow banking remains an area which constitutes continued problems - as sophisticated non accounted for off balance sheet instruments still avail - and moreover the increasing popularity of unregulated crypto assets will present future challenges for regulators - particularly where such assets are backed by governments and no central form of regulation exists to regulate this growing (and potential volatile and systemic) industry. This also implies increased roles for Pillar 2 and 3 of the Basel Capital adequacy framework - namely: supervisory review and market discipline (enhanced disclosure requirements) to complement the minimum capital requirements (Pillar One).
Basel III and Responding to the Recent Financial Crisis: Progress Made by the Basel Committee in Relation to the Need for Increased Bank Capital and Increased Quality of Loss Absorbing Capital
The recently introduced leverage ratios, enhanced supplementary leverage ratios - as well as the liquidity standards have gone a long way to addressing many problems associated with maturity transformations, excessive deleveraging short term funding and SFTs. However shadow banking remains an area which constitutes continued problems - as sophisticated non accounted for off balance sheet instruments still avail - and moreover the increasing popularity of unregulated crypto assets will present future challenges for regulators - particularly where such assets are backed by governments and no central form of regulation exists to regulate this growing (and potential volatile and systemic) industry. This also implies increased roles for Pillar 2 and 3 of the Basel Capital adequacy framework - namely: supervisory review and market discipline (enhanced disclosure requirements) to complement the minimum capital requirements (Pillar One).
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