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Basel III - Research Paper Example

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This paper "Basel III" will review the Basel Accords and the economic impact on banks because of the Basel Accords. The Basel Accords were implanted and the effects of the measures may have led to the 2008 Great Recession. Basel III was established to require banks to provide a capital buffer against their risky assets. …
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Basel III
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Download file to see previous pages A primary issue of the Basel II accords was the practice of securitization were banks combined risky loan assets into asset-backed securities and sold the securities to investors. When the housing bubble collapsed before the financial crisis, the asset-backed securities loss value and many banking firms faced insolvency and required federal bailouts. This paper will review the Basel Accords and the economic impact on banks because of the Basel Accords.
Basel I, which centred mainly on credit risk, came into existence in 1988 and became legally enforceable in the G10 nations in 1992 (Barron, J 2011). The goals of Basel I was to mandate that banks preserve enough capital to absorb losses without creating universal difficulties. Basel, I was criticized for being inadequate in its assessment of assets to risk categories because assets with different risk composition would be categorized into the same risk groups. The Basel III established the number of reserves required by banks to avert losses and cushion the financial industry against possible future financial catastrophes.
Basel II was created in June 2004 after concerns arose with Basel I because of the regulatory arbitrage. Basel II was seen as a more risk-sensitive standard that applied banks own approximates of risk in deciding minimum capital demands. Basel II placed measures on the amount and usage of a bank’s capital to cover the risks they experienced. One of the fundamental modifications suggested by Basel II is the heightened sensitivity of a bank’s capital obligations to the risk of its assets: the quantity of capital that a bank has to capture is to be directly associated to the riskiness of its underlying assets (Drumond, I 2009). Because Basel II connected the riskiness of banking institution lending with the funds it held, basically making higher-risk transactions have elevated reserve requirements than lower-risk ones (Barron, J 2011).
A chief concern of the Basel II imitative was the practice of securitization. Banks grouped risky loans into asset-backed securities and sold the securities to investors. This practice allowed the banks to move the risky assets off their balance sheets. This process allowed financial institutions to decrease their capital obligations, take on increasing risks and augment their leverage ('FOCUS: The Business Impact of Basel III' 2010). The early Basel accords permitted banks to engage in the process of securitization. ...Download file to see next pagesRead More
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