On 12th September, 2010, the World’s Financial (Authority – so called) watchdogs hammered out the new rules during last week in order to stop banks from causing another financial catastrophe. But few economists, analysts and even some bankers are feeling that the agreement (Basel III) won’t prevent any financial calamity.
Before going further let me give a brief on BASEL Committee. It is a committee which is formed on Banking Supervision - forum for regular cooperation on banking supervisory matters. Its objective is to enhance understanding of key supervisory issues and improve the quality of banking supervision worldwide. It seeks to do so by exchanging information on national supervisory issues, approaches and techniques, with a view to promoting common understanding.
The Committee is best known for its international standards on Capital Adequacy, the core principles for effective Banking Supervision and the Agreement on cross-border Banking Supervision. (History of Basel)
Now coming back to BASEL-III (yes, already BASEL – I and Basel - II are implemented), on 12 September 2010 meeting, the Group of Governors and Heads of Supervision, the oversight body of the Basel Committee on Banking Supervision, announced a substantial strengthening of existing capital requirements and fully endorsed the agreements it reached on 26 July 2010.
Before going further, let me say one thing that the Bank of International Settlements claimed that they had succeeded in the implementation of Basel II norms. But, under the Basel II agreements/ arrangement, all banks were required to maintain particular capital adequacy ratios (CARs). This is to ensure that the banks have sufficient capital and allow them to meet all demands from depositors and also to cover the losses, if a borrower defaulted on their payments. But Basel II, had a misconception, that it would ensure the banking system from collapse or from any financial catastrophe.
The Basel III Committee's package of reforms will increase the minimum common equity requirement from 2% to 4.5%. As per Basel III norms, now banks will be required to hold a capital conservation buffer of 2.5% in order to withstand stress/ calamity in future periods which brings the total common equity requirements to 7%. The higher capital requirements for trading, derivative and securitisation activities to be introduced at the end of 2011.
The interesting thing is many people started debating about Basel III from now itself, which is too early to say because the rules won’t come into effect until 2019 (9 years from now). And many think that it will be too late and it would provide very little by the time when it gets implemented.
Bernard Baumohl,chief global economist (The Economic Outlook Group) said to newsweek that "We could very well have one or two more crises before these rules even come into play". Its too early to say whether BASEL III is an angel or evil? we can (ofcourse need to) see how it functions only when it comes in operation.
