The Basel Accords have a long and not very distinguished history ! They were supposed to avoid Bank crisis but may well have part of the blame for the crisis.
Back in 1989 we had the Basel I Accord which was the first global banking accord and it meant that major international banks were supposed to hold 8% of their risk weighted assets (mainly loans) in capital so they could absorb losses without having to go to the taxpayer in times of crisis. Unfortunately the risk weighting system was very poor property loans were regarded as "safe" requiring less than 8% capital and guess what that drove banks into making property loans and guess what property markets in countries like the UK got overheated and then crashed 1992. Ffollowed of course by the subprime debacle in the United States - So lending to subprime people is safe???.
Next Basel II came along in 2004 with implementation by 2006. Many banks had argued with regulators that their sophisticated mathematical modelling of risk meant they could hold less than 8% of risk adjusted assets (eg: Value at Risk models). Hence Basel II allowed some banks to use Internal Risk Based Management (IRBM) models to hold less capital than the required 8%. Guess What we learnt from the 2008-10 crisis? Banks don't have a clue how to manage risk ! Also Basel II said nothing about liquidity and t was as much about a liquidity crisis as a solvency crisis.
Now we have Basel III and the idea is that Banks hold far more capital say 16% to 20% of the risk weighted assets plus they have a liquidity buffer and so can survive for long periods without access to the capital markets. The problem with this is that it will mean banks have far less funds to lend and this may mean economies fail to get the credit needed for economic recovery. Also banks need to raise huge amounts of capital to meet the capital adequacy and liquidity requirements at a time when people are not interesting in lends to banks or buying their shares (due to the huge losses in the previous crisis). Also banks are tending to buy government bonds which are regarded as low risk to reduce the riskiness of their assets. But what if the government bond market blows up then these supposedly safe assets would fall in value (as yields rise) meaning large losses for banks? Bloomberg has a nice story about how 27 International Banks may need to raise as much as $870 billion the meet the new Basel III rules if a 20% capital adequacy requirement is imposed (or $375 billion if a 16% requirement is imposed LINK1
Back in 1989 we had the Basel I Accord which was the first global banking accord and it meant that major international banks were supposed to hold 8% of their risk weighted assets (mainly loans) in capital so they could absorb losses without having to go to the taxpayer in times of crisis. Unfortunately the risk weighting system was very poor property loans were regarded as "safe" requiring less than 8% capital and guess what that drove banks into making property loans and guess what property markets in countries like the UK got overheated and then crashed 1992. Ffollowed of course by the subprime debacle in the United States - So lending to subprime people is safe???.
Next Basel II came along in 2004 with implementation by 2006. Many banks had argued with regulators that their sophisticated mathematical modelling of risk meant they could hold less than 8% of risk adjusted assets (eg: Value at Risk models). Hence Basel II allowed some banks to use Internal Risk Based Management (IRBM) models to hold less capital than the required 8%. Guess What we learnt from the 2008-10 crisis? Banks don't have a clue how to manage risk ! Also Basel II said nothing about liquidity and t was as much about a liquidity crisis as a solvency crisis.
Now we have Basel III and the idea is that Banks hold far more capital say 16% to 20% of the risk weighted assets plus they have a liquidity buffer and so can survive for long periods without access to the capital markets. The problem with this is that it will mean banks have far less funds to lend and this may mean economies fail to get the credit needed for economic recovery. Also banks need to raise huge amounts of capital to meet the capital adequacy and liquidity requirements at a time when people are not interesting in lends to banks or buying their shares (due to the huge losses in the previous crisis). Also banks are tending to buy government bonds which are regarded as low risk to reduce the riskiness of their assets. But what if the government bond market blows up then these supposedly safe assets would fall in value (as yields rise) meaning large losses for banks? Bloomberg has a nice story about how 27 International Banks may need to raise as much as $870 billion the meet the new Basel III rules if a 20% capital adequacy requirement is imposed (or $375 billion if a 16% requirement is imposed LINK1
RSS Feed