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Finance and Accounting : Credit and Market Risk - Essay Example
Author : stanfeest
Finance & Accounting
Pages 14 (3514 words)
Credit and Market Risk Introduction The 2008 financial crisis is responsible for bankruptcy and closedown of various reputed companies. The developed nations were the major victims. Basel II set for banking supervision has been blamed for occurrence of such a crisis…
Failure of Basel II was claimed chiefly due to maintenance of inappropriate standards for the banking sector as a whole. It failed to bring about strict regulatory control and hence most of the international banks were able to mould the rules in accordance to their interests. Basel II was absolutely a failure in terms of financial stability (Lall, 2009). The main culprit of financial crisis has been the risks. Banks indulged themselves in various activities of capital markets without having sufficient capital to do so. Linking of Variable Interest Entities (VIE) with banks was completely absent for capital regulations under Basel II (Blundell-Wignall and Atkinson, 2010). The Basel II regulations were unable to trace out this integration between market and credit risk that led to liquidity reduction. More significant regulations were required for liquidity management. This increased risks and capital market activities of banks led to significant reduction of liquidity (Madigan, 2010) .This made the drafters and regulators introduce Basel III which was expected to bring about stricter regulation across the banking sector by setting higher capital standards and requiring the international banking system to maintain a higher amount of minimal capital ratios. Overall liquidity requirements experienced a hike under Basel III. ...