Basel III is primarily related to the risks for the banks of a run on the bank by requiring differing levels of reserves for different forms of bank deposits and other borrowings. Therefore contrary to what might be expected by the name, Basel III rules do not for the most part supersede the guidelines known as Basel I and Basel II but work alongside them.On January 6, 2013 the global banking sector won a significant easing of Basel III Rules, when the Basel Committee on Banking Supervision extended not only the implementation schedule to 2019, but broadened the definition of liquid assets.

1. The Biggest Banks and Basel III
© 2014 Deena Zaidi. All rights reserved.

2. 
A focus on recent changes in Basel III
Central Banks and their regulations just got tougher. Basel
Accord has always been a matter of debates amongst
countries. Bank of International Settlements (BIS) BIS
controls the capital adequacy ratios in banks and
encourages reserve transparency. The BIS sets
“requirements on two categories of capital, tier one capital
and total capital. The United States of America in 2006,
favored strong strict central controls in the spirit of the
original 1988 accords, while the EU was more inclined to a
distributed system managed collectively with a committee
able to approve some exceptions. It is widely felt that the
shortcoming in Basel II norms led to the global financial
crisis of 2008. That is because Basel II did not have any
explicit regulation on the debt that banks could take on their
books, and focused more on individual financial institutions,
while ignoring systemic risk. To ensure that banks don’t take
on excessive debt, and that they don’t rely too much on
short term funds, Basel III norms were proposed in
2010.Failure in the transparency of many banks that are
governed by the central bank also has raised many issues
regarding the transparency of the central banks and other
banks under its umbrella.
© 2014 Deena Zaidi. All rights reserved.

3. Recently, Banks faced tighter rules on how much business they can do with each other. The Basel Committee on
Banking Supervision published rules that from 2019 will cap one too-big-to-fail bank’s financial dealings with another at an
amount no greater than 15 percent of its capital. As compared to its predecessors, Basel III is a risk-based system more
complicated. It generally requires banks to hold more capital than they’ve had to in the past. In addition, Basel III includes
a minimum leverage ratio for all banks and requires the banks to maintain a minimum amount of liquidity. The leverage
ratio or BCBS 270 is to reduce the banks’ ability to take on excessive risk. Basel III introduced a minimum “leverage ratio”.
The leverage ratio was calculated by dividing Tier 1 capital by the bank’s average total consolidated assets. The banks
were expected to maintain a leverage ratio in excess of 3% under Basel III. In July 2013, the US Federal Reserve Bank
announced that the minimum Basel III leverage ratio would be 6% for 8 Systemically important financial institution (SIFI)
banks and 5% for their insured bank holding companies. In January 2014, the definition of exposure was changed by BIS
to include off-balance sheet transactions such as OTC derivatives, and required those trades be counted in gross notional
value. The measures also refine an existing rule capping the amount of business that a bank can do with a single
counterparty at no more than 25 percent of its capital.¹
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4. A look at Europe & USA
With this news, a closer look at economies of USA and
Europe is but obvious since they have been culprits and
victims of the world global collapse and have bailed out
many of their banks. Mountains of bad debts, many not
yet written off, and the resulting shortage of capital are
restricting the flow of credit to the rest of the economy in
Europe. In America, by contrast, regulators are
ratcheting up the levels of capital (mainly equity and
retained profits) they demand of banks, convinced that it
will lead not just to a safer banking system but also one
better able to lend to companies. On March 20, 2014,
Federal Reserve announced that 29 out of 30 major
banks met the minimum hurdle in its annual health check.
The two banking systems are not completely comparable,
largely because European banks hold large portfolios of
mortgages on their balance-sheets but the differences
are striking. Most big American banks are close to their
new leverage target of 5%, whereas many European
banks are struggling to meet the lower Basel threshold .
© 2014 Deena Zaidi. All rights reserved.

5. Conclusion
Bailing out big banks through tax payers’ funds is definitely not a wise choice. The credibility of banks need to be
tightened and made more transparent. Basel should focus more on morality of banks and have strict regulations for
banks. Capital structures and leverage ratios are all part of banking and should be dealt with only once the
credible banks are distinguished from the fraudulent ones. Regulators should keep in mind that a small bank can have
more creditworthiness and faith amongst investors than a big fraudulent bank and bailing out the latter will only harm
the economy and shake an investors’ confidence. Having said that, it is important to keep in mind that failure of banking
system in the past happened not because of capital inadequacy but due to lack of liquidity. Too much lending with less
cash ( liquidity) can lead to serious issues. Eventually, the banks that fail know that they are big and will be bailed out
once a crisis occurs. Stringent laws need to be incorporated so that the ‘Too Big To Fail’(TBTF) theory is not always
correct. We need to understand that due to huge global connection of banks , such theories can cause more harm to
other nations. They might correct that specific country’s financial health but may cause serious damage to other parts of
the world. TBTF remains a debatable issue but we hope that Basel Accords will be able to do some justice to the world
banking system.
© 2014 Deena Zaidi. All rights reserved.