Harsh Reality for Basel III: Now it’s the Question of Preserving the Euro (original) (raw)

The Basel III agreement increases capital requirements and suggests the implementation of capital and liquidity buffers to protect banks against risk while leaving the problem of the source and the propagation of systemic risk in the system aside. Banks will be better individually protected against expected risk while systemic risk will develop in the economy. This development could lead to unexpected losses for which capital and liquidity buffers and requirements could be too low. Indeed, the process of securitisation and risk transfer towards the shadow or parallel banking system weakens the sustainability of the entire financial system. In this respect, the agreement provides answer for the protection of individual banks while leaving aside the issue of the propagation of systemic risk in the financial industry

Basel III (or the Third Basel Accord) is a global, voluntary regulatory standard on bank capital adequacy, stress testing and market liquidity risk. It was agreed upon by the members of the Basel Committee on Banking Supervision in 2010–11, and was scheduled to be introduced from 2013 until 2015; however, changes from 1 April 2013 extended implementation until 31 March 2018 and again extended to 31 March 2019. The third installment of the Basel Accords (see Basel I, Basel II) was developed in response to the deficiencies in financial regulation revealed by the late-2000s financial crisis. Basel III was supposed to strengthen bank capital requirements by increasing bank liquidity and decreasing bank leverage.

This paper focuses on the evolution of global banking regulations set by the Basel Committee on Banking Supervision known as the Basel Accords. We argue that argue that both Basel I and Basel II have failed and we expect the same from Basel III. We believe Basel III will fail because of: i) path dependency on two previous failed accords, ii) delayed implementation, iii) strong pressure from bank-supported lobbyists and finally iv) strong influence of politicians. Rather than proposing new banking regulatory initiatives, we recommend imposing higher personal responsibility for bank managers, regulators and supervisors. As a result, Basel III will not prevent future crises from affecting the global banking industry.

With Italy on the verge of a sovereign crisis and in the middle of a banking crisis, the European Banking Union and the Basel III ratios seem to have been unable to force drastic corrective measures to avoid what could be a systemic crisis, not only for the country but also for the euro zone and beyond.