Money and capital market - Essay Example

Money and Capital Market Table of Contents Table of Contents 2 Introduction 3 Discussion 3 Basel Accords 3 Factors that Led to Transformation from Basel II to III 4 Gaps in Basel II 4 Positive Prospects of Basel III 5 Conclusion 6 References 7 7 Introduction The significance of commercial banks in financial system can be depicted from the fact that they are among the most important financial institutions that operate in any particular region. Their effective functioning is crucial owing to the support they provide to the economic growth of a particular region.

In order to safeguard the significance of these financial institutions, regulating authorities have incepted the frameworks of Basel accord comprising of Basel I, II and three (Hai, Minhaj, & Ahmed n.d.). With reference to this, the paper will discuss about the challenges and issues associated with Basel II, which further led to the proposal of replacing it with Basel III. Discussion Basel Accords Basel Accords refer to a set of banking regulations issued by Basel Committee on Banking Supervision (BCBS).

The association has developed three Basel accords till date, which comprise of Basel I, II and III. The first Basel accord was introduced in the year 1988. By the year 2008, Basel II came into existence and was readily accepted in various regions of the world. However, owing to certain facets, BCBS proposed a transformation from Basel II to III in the year 2013 (Lall, 2009). Factors that Led to Transformation from Basel II to III On the grounds of the causes in respect of the recent 2008 global financial crisis, critics have argued many limitations of the regulations enforced in accordance with the Basel II standards.

In this regard, the sub-prime lending deficiency that gave rise to the historic housing bubble in the global economy can be illustrated as a good example. It was mainly owing to the deficiencies of the financial institutions and the investors to assess the quality of the credit applicant, based on the variations observed in interest rates. In this context, there was a high need of switching into a new set of regulations that can avoid such crises situations, owing to the faulty decision making of financial institutions and investors (Lall, 2009).

Gaps in Basel II It has been observed from the financial crisis of 2008 that Basel II was not capable enough to provide guarantee of financial stability for any particular region because of its limitations in terms of planning deficiencies. In fact, the implementation of Basel II contributed marginally towards the expansion of the crisis. In this regard, the example of Hong Kong would be noteworthy. The financial crisis reached to its obnoxious extent in the country, after the implementation of Basel II.

In addition, the example of the decline of Lehman brothers will also justify the inefficiency of the Basel II framework. To be noted, the callable credit-linked notes offered by Lehman brothers were sold to more than 34,000 investors through banks. However, after the fall of the Lehman brothers, it was revealed that the banks were unable to depict the underlining uncertainty associated with such products, which further raised questions over the efficiency of the Basel II framework (SHEI, 2010).

Furthermore, it was also argued that Basel II can only be beneficial for certain large banks with upgraded risk modelling systems. Additionally, the implementation procedure applied for the Basel II framework is quite complex for the banking and financial organizations, which further calls for transformation. It has also been noted that the success of Basel II directly requires the presence of consistent, accurate as well as the timely reporting of data. Thus, financial systems which have the absence of these aspects will not be able to effectively implement the framework.

In addition, another issue associated with Basel II is its norm, which instructs only the banks to implement the same, can further influence the overall stability of the economy (Hai, Minhaj, & Ahmed n.d.). Positive Prospects of Basel III Basel III is expected to overcome the flaws associated with the Basel II. It is focused towards strengthening the liquidity as well as capital adequacy of the financial institutions. Moreover, the broadened framework of Basel III is also expected to restrict the financial institutions to indulge in unethical practices (Eubanks, 2010).

Conclusion It can be apprehended from the overall discussion that there are certain serious challenges associated with the Basel II framework, which ultimately triggered the need for a better Basel III standard. Owing to its limitations, Basel II also is often argued as a vital reason for the incompetency of financial institutions, which further led to the financial turmoil in 2008. Moreover, with certain revised strategies and added benefits, Basel II is expected to be the potential replacement for Basel III.

References Eubanks, W, W 2010, Status of the Basel III Capital Adequacy Accord, DIANE Publishing, Collingdale. Hai, S, S, Minhaj, S, Q, & Ahmed, R No Date. ‘Implementation of Basel II: Issues, Challenges and Implications for Developing Countries’, retrieved 23 August 2013, Lall, R 2009, ‘Why Basel II Failed and Why Any Basel III is Doomed’, Global Economic Governance Programme, pp. 1-37, retrieved 23 August 2013 SHEI 2010, ‘Basel II: Problems and Prospects of Usage in National Banking Systems’, retrieved 23 August 2013