Basel III Rules - Essay Example

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Basel III rules The new rules of Basel III : Opportunities and challenges for banking sector The implementation of Basel I and Basel II norms certainly helped in regulating the financial situation in several parts of the world (Balthazar, 2006). Basel I and Basel II norms were initiated with an objective of establishing the efficient financial practices in banking and other financial organizations (Pritchard, 2004)…
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Download file to see previous pages Australia also faced such type of economic recession and banks were exposed to market risk. Thus some more financial reforms are needed that can help the organizations to face the emerging new challenges efficiently. Hence, Basel III norms have been implemented by Basel Committee on Banking Supervision (BCBS). This essay will illustrate the opportunities to be created by Basel III norms that help in providing better financial risk management; it also will discuss the challenges or negative impacts of Basel III. Basel III emphasized on developing risk resilience mechanisms that can be practiced in financial institutions including banks. Basel III norms also called for controlling the financial irregularities by implementing strict regulations. It provided financial protection to banks by following minimum adequate cash reserves that can sustain their financial needs for minimum period of 3-4 months at the time of financial crisis. The risk bearing ability of the banks was also strengthened through the major financial regulations that are sufficiently dynamic in nature to respond to the market changes positively from time to time (The Economist, 2010). According to the norms of the Basel III, the banks are required to hold a minimum of seven percent of tier 1 capital, namely cash reserves and common stock which is a good jump from present level of two per cent. This is very significant step to provide higher risk bearing ability to banks against the financial crisis. Similarly, the tier one capital is also a core measure of a bank's financial strength and by increasing this component, the risk bearing ability of the banks would be enhanced tremendously. Tier 2 capital will be regulated for its sustainable growth and tier 3 capital will be removed completely according to Basel III norms. In addition, they have to improve the capital requirements for counterparty credit exposures which provide them better cushion to withstand financial shocks. At the same time, as per the norms of Basel III, the risk management of counter party credit exposures and capital buffers have to be strengthened which would provide cushion at the times of financial stress. This would result in higher immunity for the banks against interest rate risk and market risk in future. In consequence, the successful implementation of all these measures suggested in Basel III would certainly enhance the financial stability of the banks and reduce the need for the government bailouts during the financial crises. In contrast, the implementation of some clauses of Basel III has some potential disadvantages and banks have to face new challenges. For example, according to Basel III agreement, the banks are required to hold higher amount of capital reserves with themselves as a protection against the financial risks involved with the longevity of their own debts and the risks that banks attach to different kinds of loans (Peston, 2010). This would certainly provide them better protection during the times of financial crisis, but at the same time, the profit margin of the banks and their investment opportunities will erode significantly (Black Swain Insights, 2010). This is because of the fact that the banks have little amount to disburse in the form of loans to the customers and hence they may have to charge additional interest rate. In other words, the ...Download file to see next pagesRead More
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