Task Solutions | Time Evolution and Relevant Criticism: NURS6052

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Time evolution and relevant criticism
of BASEL I, II, III Regulatory
framework: The impact of the global
financial crisis.
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Table of Contents …

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Time evolution and relevant criticism
of BASEL I, II, III Regulatory
framework: The impact of the global
financial crisis.
1
Table of Contents
Abstract ……………………………………………………………………………………………………………………………….. 2
Research Title ………………………………………………………………………………………………………………………. 2
Introduction …………………………………………………………………………………………………………………………. 2
History past evolution …………………………………………………………………………………………………………… 3
Motives ………………………………………………………………………………………………………………………………… 3
Measurement ……………………………………………………………………………………………………………………. 4
Empirical evidence ……………………………………………………………………………………………………………. 4
Methodological framework ……………………………………………………………………………………………….. 6
Data and assumptions ……………………………………………………………………………………………………….. 6
Results ……………………………………………………………………………………………………………………………… 7
Value in creation ……………………………………………………………………………………………………………….. 8
Determinates ………………………………………………………………………………………………………………………… 8
Managing indication …………………………………………………………………………………………………………….. 8
Conclusion ……………………………………………………………………………………………………………………………. 8
References ………………………………………………………………………………………………………………………….. 10
Appendix ……………………………………………………………………………………………………………………………. 13
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Abstract
This report analyses the evolution and the failure of Basel accord I.II and III. And
their impact on the financial crises. The findings of the paper are that Basel II set the
foundation and the future of the Basel III failure associated with the financial crises. The
method by which the failure is done is the ‘Quantitative Impact Study (QIS) by this study and
the A-IRB strategy .The accord has failed to achieve its objectives, which was to continue
and enhance the equality which is competitive among all banks. The QIS study shows that
financial institution which was larger made asignificant profit under the approach of A-IRB.
Research Title
Critics of BASEL I, II, III and its impact on the global financial crises
Introduction
Due to the recent collapse of the Bretton wood system on the structure of finance. The
Basel Committee was formed aiming at the supervision of banks and forming an international
structure of finance. The committee was formed in the year 1974. The aim of the accord was
the establishment of the capital and assessment of the risk measurement for the global banks.
These accords were designed to ensure the banks keep adequate capital to meet the sudden
adequate capital. The accord was set up by the Basel Committee on Bank Supervision
(BCBS). The development of Basel, was risk mitigation to the financial institution,
consumers, and the economy. The criticism of the accord was the reduction of the capital
reserve for the bank. Basel one also hampered the activities of the bank and slowed the
economic growth which was because of the capital lending to the lenders which was less.
Furthermore, both Basel Iand II failed at averting the financial crises and the great recession.
Because the great recessions made the backdrop of Basel III (Viterbo, 2019).
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History past evolution
According to the research done by Ioana Raluca Sb ârcea, the prevention of the bank
risk in all three accords are been evaluated. The research shows the reason behind the failure
and changes made in each accord which should be made by the commercial bank. The
analysis of the international regulation on the management of the risk. The research has
observed that interest is permanent for the establishment of the accurate technique of the
assessment which is used to reduce the risk. This risk is subjected to every bank. There have
been also made significant changes in the accords due to the failure of the previous accords.
The result of the study aims at the Basel II has made the enlargement of the risk which came
in the calculation of the adequacy of the capital with this there is also risk diminishing which
shares the exposer of the retail and towards the SSIF. And Further changes made on the Basel
III, were due to the tightening of the conditions imposed on the banks. The comparison of the
Basel III, to the previous accord has shown that increase in the capital which the international
bank should undertake to follow the requirements (Sb ârcea, 2014).
Motives
The motive for understanding the formation and the failure of all three Basel Accords
is important in estimating and meeting the financial crises in the future.
To address Basel III, acommittee was introduced to address the failure of Basel and
the losses which happened in 2007-2008. III Basel has mostly three focus areas, the
regulatory framework of the capital, bank leverage, and liquidity. And the development of the
liquidity ratio in the short run and long run. The regulatory framework should not focus on
lowering the probability of the bank and its failures (Gottschalk et al., 2021).
Failure of the Basel II, Basel II was aset of capital adequacy standards which was for
the bank operating internationally, by the supervisory committee of the G10 was to avoid the
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crises financial. However, the paper(Lall, 2009) argues that the development of Basel is false,
and Basel was not created as the solution to the financial crises but that itwas the cause of the
financial crises. The aim of Basel was so out of short of the aim of improving the
international bank safety (Hossain et al., 2017).
Measurement
Survey There was atest on 153 countries to evaluate the research is the banking
regulation act which is Basel and the banking system which is the domestic effect on the
wealth of the nation. The methods were by evaluating the GDP and growth. The research of
the study was that the regulation of capital and supervision have no relation to the measure of
the economy and that ithas no influence on the wealth of the nation and on the economic
measures. The research also evaluated that those countries with greater accounting and
practice of accounting, transparency of finances, and credit rating efficacy are with more
wealth (Noor et al., 2020).
To address Basel III, acommittee was introduced to address the failure of Basel and
the losses which happened in 2007-2008. Basel III has mostly three focus areas, the
regulatory framework of the capital, bank leverage, and liquidity. And the development of the
liquidity ratio in the short run and long run. The regulatory framework should not focus on
lowering the probability of the bank and its failures (Taskinsoy, 2018).
Empirical evidence
The financial crises were due to the collapse in 1974, of the New York-based Franklin
National Bank and the German Herstatt Bank these financial crises explained that not one
country is responsible for the crises and the collapse but coordinated international actions
were thus needed in the crises management. Basel Concordat was established in the
determination of rules for every individual country in 1975. With this regulation, the
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Americans have the upper advantage or the comparative disadvantage that is in the
comparison to the Japanese bank whose levels of capital are more lower. The American
regulators did seize the committee of the Basel to make the common regulatory framework of
the banks operating internationally which is Accord on Capital Adequacy in 1988 Basel I
(Lall, 2009).
However, as polls revealing the potential impacts of Basel II have emerged, ithas
become painfully evident that the agreement has failed to meet any of its declared goals. In
terms of the first goal, every official ‘Quantitative Impact Study (QIS) done by the Basel
Committee predicts significant reductions in capital for banks using the A-IRB strategy when
compared to Basel Ilevels (Lall, 2009).
According to the 2006 QIS-4, these banks will see a15.5 percent decrease in overall
capital requirements and a31% decrease in Tier 1capital. 17. Supervisory estimates aren’t
any better. According to a2003 analysis by the US Federal Deposit Insurance Corporation
(FDIC), American banks the average capital levels that adopted the advanced approach
would decline by 18-29 percent, with some witnessing drops of more than 40%. Because the
huge banks who are most likely to follow this method control such asubstantial portion of the
market, banking system and its overall capital levels is to fall, which is in direct conflict with
Basel II’s principal goal. For example, according to QIS-4 estimates, total capital in the
system of American banking immediately before Basel II’s implementation was at ahigh
level just before the implementation of Basel II (Lall, 2009).
Empirical evidence has also suggested that there is no association between the
development of abank and performance with the supervisory power.
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Methodological framework
The Methodological done by (ElBannan, 2017) has measured the effect of the bank-
specific indicators, determinants of macroeconomic ,and industry-specific on the individual
profitability of the bank. The second study has focused on the determination of the
performance of the bank on the individual country analyses which has focused on the
country’s profitability.
The accord has not meet its objectives, which was to continue and enhance the
equality which is competitive among all banks. The QIS study shows that financial institution
which was larger made asignificant profit under the approach of A-IRB. For instance, in
2006 the QIS-5 shows that A-IRB banks have areduction in the capital of 7.1 to 26.7%, and
those banks who are under the standardization approach will have a1.7% increase in the
capital gains overall. A survey in 2006 of the hundred banks did believe that Basel II
benefited mostly the large banks.
Banks were eventually allowed to use their own model the overcome and the
determination of the market risk. The VaR model in 1990, has vastly determined the
probability of extreme events. In the same way, there is also asimilar shift in the self-
regulation in view of the Basel Ishortcomings, A-IRB banks are likely to experience afall in
the capital requirements that is up to 17.3% (Lall, 2011).
Data and assumptions
The repercussion of the Basel accord on the bank profitability consists of the capital
requirement which is minimum, oversight supervisory and there is monitoring by the
supervisions which is powerful by the market discipline and agencies. The focus on the cross
country analyses to the test the impact of the regulation on the bank, The cross country
studies have made the primary investigation on the regulation of the bank, ithas supervision
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of the sample of the forty-five countries, after that the sample was extended to the sixty more
countries (Barth et al., 2001).
The advantage and disadvantage of giving such broad powers of the supervision
which the Basel has, on the one hand, such strong officials can prevent the managers from
having abehavior of excessive risk which henceforth enhance the development of the bank,
stability, and performance. this supervision has led to high corruption (Schapiro, 2021).
There is disagreement with the requirement of the Basil that empowers the
supervisory that oversees the bank insisted the evidence provide will supervisor of the bank
has been ineffective in the reduction of the overhead cost of the bank, the supervision has
also resulted in the corruption increases in the bank as the research have provided the
correlation which is positive between the supervision and the corruption in lending. The
research studies that private monitoring will improve the performance of the bank
(Schulman ‐Green et al., 2021).
Results
The research done by the Mona A. ElBannan concluded that the global financial crisis
was formed by the poor risk management measures for instance the stress testing and
management of risk tools, that they had the inability to forecast the losses and the expected
outcomes which were adverse. The accords were also failed because of the unexpected the
measures to overcome the outcomes and evaluate the capital size needed to overcome the
shock (ElBannan, 2017)
Since 1988 there have been various changes in the Basel accord, there was aconcern
regarding the requirement of the minimum capital, supervision which was strict and ithas
disciplined the market with the use of transparency and disclosure has made many
researchers study and analyses the performance of the bank and the capital cost. The risk-
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based adequacy of the capital and the supervisory requirements which were set by the Basel
accord in the 2007 crisis caused instability and disturbances in the banking sector (ElBannan,
2017).
Value in creation
The main evidence presented in the report indicates the many causes of the failure of
Basel III. According to the research done by Ioana Raluca Sb ârcea, the prevention of the
bank risk in all three accords are been evaluated. The research shows the reason behind the
failure and changes made in each accord which should be made by the commercial bank
(Boora & Jangra, 2019).
Determinates
There has been agap between the Basel committee’s initial thoughts and the end
product of the Basel accord. The policy of Basel has gotten relatively less attention on the
policies but there are three schools of thought according to the outcomes of Basel II. The first
school of thought indicates the theory of international relations (Rizvi et al., 2018).
Managing indication
The failure of Basel II is by the first indicators of the supply side, which is of the
concern of the institutional context. Basel II’s failure creates amuch more comprehensive
approach to the failure in the management of the risk, the failure also streamed from the
treatment which was inadequate the securitization (Benetton et al., 2020).
Conclusion
In the recent history of international regulation and banking is failure after failure.
This failure is seen twice in the last 15 years. According to the research done in the paper one
of the reasons for the failure of Basel, the accord is the agenda of the committee,
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scrutinization, and the hypothetical standard for the maintenance of the capital. The aim of
Basel III has mostly three focus areas, the regulatory framework of the capital, bank leverage,
and liquidity. The accord has failed to meet its achieved its objectives, which was to continue
and enhance the equality which is competitive among all banks. The QIS study shows that
financial institution which was larger made asignificant profit under the approach of A-IRB.
Furthermore, the high standards put by the regulatory authority are one of the reasons for the
failure. Failure of the Basel II, Basel II was aset of capital adequacy standards which was for
the bank operating internationally, by the supervisory committee of the G10 was to avoid the
crises financial. There has been agap between the Basel committee’s initial thoughts and the
end product of the Basel accord. The policy of Basel has gotten relatively less attention on
the policies but there are three schools of thought according to the outcomes of Basel II. The
first school of thought indicates the theory of international relations.
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References
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