Bank Regulations: Basel III and Banking Act 2009

As a current regulation, Basel III was seen as the response to the sub-prime financial crisis from systemic risk perspective. The developed Accord experienced a series of amendments (2010-2013) as well and expanded until 2018. The new parts relating to bank capital adequacy, stress testing and market liquidity risk with more concerns.

This international bank regulatory framework highlights Capital and Liquidity. Capital part involves three pillars are similar to Basel II while increase bank liquidity and decrease bank leverage constitute the second one. Comparing with early Accords, the banking capital’s quantity and quality increased; two liquidity ratio, namely, liquidity coverage ratio (LCR) which revised in 2013 by the Group of Central Bank Governors and Heads of Supervision (GHOS) and net stable funding ratio (NSFR), as well as one non-risk based leverage ratio, were added (Co-Pierre Georg, 2011).

There is a video about overview of Basel III. General speaking, it discussed three sections, as follow:

Capital—it requires banks set aside more than 7 per cent rather than 2.5 per cent of risk-weight asset according to activities’ nature or bank’s types. 

Liquidity Ratios—stress testing manages the level of bank liquidity. Cross selling will manage the liquidity of deposits and loans. It also leads to operational intimacy.  

Leverage Ratio—the terms of balance sheet should be reduced so that put aside for development and comparing its own capital.

In the implemented duration (2011/19), the committee issued specific requirements respectively for recovery of banking (Basel III). Basel III also improves the transparency though a macro-prudential approach (Co-Pierre Georg, 2011), which is an opposite response to recent financial crisis affected by insufficient micro-prudential approach.

Has Basel III worked? Harle etal. (2010) argued banks potential responses such as ‘no-regret moves’, ‘balance-sheet restructuring’ and ‘business-model adjustments’. They also guessed the Accord would work in the European Banking sector. Cosimano and Hakural (2011) suggested that equity-to-asset of large banks would go up 1.3 per cent averagely. Allen et al. (2012) critiqued the reform would limit credit’s availability and decrease economic activities. 

The following video provides a variety of opinions regarding above question:

The Basel Accords—capital adequacy regulations—critiqued in decade due to several shortcomings. Viewing subordinated debt as capital; such a low minimum risk asset ratio; the conflict between micro- and macro-prudential approaches, etc. Whatever, the Accords contributed in the recent decade, and could be guilty.

Besides, the Banking Act 2009 is contemporaneous principal banking regulation in the UK. As an Act of the Parliament of the United Kingdom, the Banking Act 2009 entered into force in part on 21/02/2009 to replace the Banking (Special Provisions) Act 2008. The main concept encompasses following parts: Special Resolution Regime (SRR), Bank Insolvency, Bank Administration, Financial Services Compensation Scheme, Inter-Bank Payment Systems, and Banknotes: Scotland and Northern Ireland, Miscellaneous, and General. The core provision relate to a promoted regime--the SRR impacted by the Treasury, Bank of England and Financial Services Authority which have the substantial powers to manage (Linklaters). Therefore, I will discuss the regulators later.