Financial Services Essay Example | Topics and Well Written Essays - 3000 words

Financial Services - Essay Example In December 2010, the Basel Committee had come up with a fresh version of its latest standards for bank capital as well as liquidity obligations. This latest set of worldwide regulatory standards for banks is referred to as the Basel III. The core facets of Basel III are planned to be realised as nationwide regulation by the first half of 2013. However, while certain portions of the new Basel principles are supposed to become effectual upon execution, the others would be implemented over a phase of numerous years. The main reason for the development of the Basel III was the deficits in the financial policies of the Basel Accord II that were exposed during the worldwide financial calamity in the year 2008 (Bank for International Settlements, 2011). This paper critically examines the general approach to measuring capital adequacy levels of banks as per the new standards implemented by the Basel III. The paper subsequently discusses the drawbacks of the Basel II standards that were expo sed during the 2008 worldwide financial catastrophe and which consequently led to the development of the Basel III standards. Additionally, the paper also appraises whether the imposition of the Basel III standards for capital adequacy as well as liquidity obligations of bank will be sufficient to prevent a further financial calamity in future. Background to Basel III Various regulatory bodies have recognised that the prevalent strategies of capital regulations of the banks in the United States as well as the European Union, on the basis of the Basel I and the Basel II Accords as a major reason contributing to the 2008 financial disaster (Shearman & Sterling, 2011; Dowd & Et. Al., 2011). This can be substantiated from the fact that under the prevalent... The paper tells that various regulatory bodies have recognised that the prevalent strategies of capital regulations of the banks in the United States as well as the European Union, on the basis of the Basel I and the Basel II Accords as a major reason contributing to the 2008 financial disaster. This can be substantiated from the fact that under the prevalent capital adequacy policies prior to the financial crisis, the least regulatory capital obligations of banks were inadequate. The low capital obligations imposed on the banks as per the Basel II in addition to certain standards linked to the Basel I were deficient in the context of the elevated exposures and real tangible losses endured by the banking entities during the economic downturn. It was also stated that the quality of the capital maintained by the banks as per regulations were time and again found to be inadequate in absorbing the losses sustained by the banks during the economic crisis successfully. The capital adequacy policies set as per the standards of the Basel II along with that of the Basel I, did not sufficiently detain the risks that were caused by bank exposures to certain dealings. The transactions or dealings that increased the exposures of the banks that the regulatory standards failed to capture were securitisations, repurchase agreements and derivatives. The regulatory policies of Basel I and Basel II also failed to effectively take into account the systemic risks related to the upsurge of leverage in the fiscal and monetary system.