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The Current Financial Crisis: Causes and Policy Issues - Essay Example

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The Current Financial Crisis: Causes and Policy Issues

This new regulatory standards about capital adequacy of banks has been hailed as requirements that are likely to strengthen bank capital and liquidity thus helping banks to have leverage. However the GDP needs to be considered as an agent and necessary consideration when setting the banks liquidity levels. Basel III has given three tiers which are to be considered by the bank before being accepted as fulfilled the requirement. According to the committee , in order to have a consistent ,transparent and quality capital there is need to have tier one consisting of shareholders equity, tier two consisting of instruments like derivatives and bonds. The committee also introduced risk coverage framework where they required a proper credit and market risk management. It required that credit should be valued adjusting for risk. It also required that banks should strengthen credit exposure risks by raising capital buffers. The committee has given dates when these requirements should be implemented by banks. In 2011 banks are required to come up with strategies of monitoring liquidity ratios of the banks as well as develop a supervisory framework which will ensure that leverage is maintained. In 2013 banks should start running parallel leverage ratios in order to reduce risks for a financial crisis. They are also required to start increasing capital requirement to the higher minimum requirement that have been set. In 2015 banks are required to attain the highest minimum capital requirement as well as attain the required leverage ratio. The liquidity coverage ration will be introduced in 2015 according to the committee, and 2016 the bank should start the process of increasing conservative buffer level. In 2017 the bank is required to make final adjustment to the leverage ratio which will be completed in 2018, still introduction of net funding ratio which ensure that banks maintain a certain funding to keep their stability. Large scale de-leveraging had been forced upon banks due to heavy losses along with the huge reduction in counter parity risk exposure. Analysts believe that the post crisis period will be characteristic of a financial set up that will have low levels of leverage, lesser number of mismatches in funding in terms of both currency and maturity, lesser exposures to counter parity risks and higher transparencies in the context of financial instruments that will be used. During the 1990s the banking business model was moving towards an equity culture and focusing upon fast growth in share prices and earnings. Previously banks worked on a model that was based on balance sheets and other old fashioned spreads related to loans, which were not allowing banks to expand speedily. As a result, they had shifted to strategies that focused upon activities based on trading incomes and fee through the process of securitization that allowed banks to enhance profits while economizing on capital expenses at the same time. Viewed from this perspective the model related to originate to distribute along with the process of securitization, is not necessarily about spreading risks; instead it is a major part of the procedure that drives revenues, returns on capital and share prices towards higher levels (The Economist, 2010). The model is more in the nature of ...Show more


Financial Services Coursework Name Institution Instructor Course Date a). The proposals made about capital ratios of banks by Basel III committee have increased a minimum capital requirement for banks from 2% to 4.5% of risk-waited assets. These changes are meant to assist a bank to have a higher liquidity levels which will help to compact financial like the one experienced in 2007/2008 where the banks collapsed leaving the whole world with a crisis that has never been witnessed before…
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The Current Financial Crisis: Causes and Policy Issues essay example
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