EECS 1541 Lecture Notes - Lecture 13: Basel Committee On Banking Supervision, Basel Iii, Basel Ii
22 Jun 2018
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EECS 1541 Lecture 13 Notes
Introduction
Basel III Accord
Basel II Accord Banking regulators who formed the so-called Basel Committee
completed another accord (called Basel II) that subjected banks to more stringent
collateral guidelines to back their loans.
In addition, this accord encourages banks to improve their techniques for controlling
operational risk, which could reduce failures in the banking system.
The financial crisis in 2008–2009 revealed that banks were still highly exposed to risk, as
many banks might have failed without government funding.
The crisis also illustrated how financial problems at some banks could spread to other
banks and how financial problems in the banking system could paralyze economies.
A global committee of bank supervisors discussed solutions that would enhance the
safety of the global banking system with the aim of preventing another financial crisis.
This led to a global agreement among bank regulators in September 2010 that is
informally referred to as Basel III.
The accord called for estimating risk-weighted assets with new methods that would
increase the level of risk-weighted assets and thus require banks to maintain higher
levels of capital.
It also required that capital be at least 6% of total risk-weighted assets.
Basel III also recommended that by 2016 banks establish an extra layer of capital, a
capital conservation buffer, amounting to at least 2.5 percent of risk-weighted assets.
Banks that do not maintain this buffer could be restricted from making dividend
payments, repurchasing stock, or granting bonuses to executives.
This accord also focused on ensuring that banks maintain a sufficient level of liquid
assets that can be easily sold if access to cash is needed.
The liquidity provisions are controversial because severe restrictions on liquidity could
force a bank to hold assets that earn less than its cost of funds.
Document Summary
Basel ii accord banking regulators who formed the so-called basel committee completed another accord (called basel ii) that subjected banks to more stringent collateral guidelines to back their loans. In addition, this accord encourages banks to improve their techniques for controlling operational risk, which could reduce failures in the banking system. This accord also focused on ensuring that banks maintain a sufficient level of liquid assets that can be easily sold if access to cash is needed. The liquidity provisions are controversial because severe restrictions on liquidity could force a bank to hold assets that earn less than its cost of funds. As a consequence, banks could be exposed to higher default risk. All of the basel iii provisions are meant to be phased in. This accord encourages banks to improve their techniques for controlling operational risk, which could reduce failures in the banking system.
