Stopping bank collapses
Issues
Banks were one of the main causes of the global financial crisis and its aftermath. The crisis exposed glaring holes in financial regulation. LICs were affected, as many international banks have operations in LICs, and credit to both domestic and foreign banks dried up, which curtailed economic activity at all levels. The BCBS Basel III framework of capital and liquidity requirements launched in December 2010 aims to tighten up bank regulation and reduce the risk of future collapses. It requires member countries to implement supporting regulations and legislation by 1 January 2013, and phase in Basel III by 1 January 2019.
There has been criticism of Basel III that it, as with previous regimes, is based on perceived risk, and does not adequately address unperceived risk. As a consequence it pushes banks towards AAA rated debtors (including Greece and Ireland) because of loan capital requirements, and away from micro, small and medium enterprises (the engines of economic growth in LICs).
Next steps
Next steps as of April 2011 include reviews of:
· Calibration of ratios via regular data collection from banks
· Implications of Basel III for individual banks, the banking sector, and financial markets, addressing unintended consequences
Key contacts
References
· (Jul 2011) Basel III framework for liquidity frequently asked questions
· (Jun 2011) Basel III: A global regulatory framework for more resilient banks and banking systems - revised version