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Finance and Accounting : Credit and Market Risk - Essay Example

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Finance and Accounting : Credit and Market Risk

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. These reforms were made to achieve upgradation in the standards of international banking system through better management of liquidity and infrastructure (Basel III- What is it? How will it concern you?, n.d). Thus integration of markets and credit risks and failure of Basel II for banking supervision were the major causes for financial crisis. The current paper tends to address this issue through various findings. The financial crisis had been the major cause of homelessness and unemployment particularly for the world’s major economies. The financial crisis became a concern for regulators and they began to alter rules and regulations under Basel II. The need for better risk management and liquidity management had forced the regulators to introduce Basel III, stricter guidelines in order to set up a crisis resistant international banking system and plug in the loopholes of previous banking supervision regulations that had led to the crisis. Credit risks Financial management is concerned with increasing rates of return for a specified exposure to risks. For tracing out the magnitude of credit risk an individual should refer to the asset involved which is termed as credit risky (Banks, Glantz and Siegel, 2007, p.17). The financial crisis had already proved that increased risks on credit for asset portfolios had dragged the banks towards bankruptcy. The move towards securitization of markets proved o be wrong. This is because it harmed consumers’ protection in loan market although they were over extended (Kiff and Mills, 2007). When risks, both idiosyncratic and for sectoral factors are imperfectly diversified, it gives less support to capital computations under approaches related to IRB. Presence of immense concentration of risks may violate The Asymptotic Single risk factor model. The previous credit risk measures were unable to perform full synchronization of underlying default risks to all the sectors of business which led to diversion from elementary IRB model for risk management. Post crisis computation of credit risks for portfolios related to credit has been termed extremely important to detect the link between ...Show more


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…
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Finance and Accounting Essay: Credit and Market Risk essay example
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