Basel III – Responses to Consultative Documents, Vital Aspects of the Consultative Processes and the Journey Culminating in the Present Framework

Abstract

This paper is aimed at providing a comprehensive overview of, and responses to, four very vital components of the consultative processes which have contributed to the new framework known as Basel III. The paper will approach these components in the order of the consultative processes, namely, the capital proposals, the liquidity proposals and the Proposal to ensure the loss absorbency of regulatory capital at the point of non-viability. The capital proposals comprise proposals aimed at strengthening the resilience of the banking sector, the proposal relating to international framework for liquidity risk measurement, standards and monitoring and, the countercyclical capital buffer proposal.

Whilst the capital proposals have been welcomed, there has been growing realisation since the aftermath of the recent Financial Crises that banks which have been complying with capital adequacy requirements could still face severe liquidity problems.

As well as highlighting the importance of introducing counter cyclical capital buffers, the response to the countercyclical proposal draws attention to the need for greater focus on more forward looking provisions, as well as provisions which are aimed at addressing losses and unforeseen problems attributed to “maturity transformation of short-term deposits into long term loans.”

The Basel Committee’s consultative document on the “Proposal to Ensure the Loss Absorbency of Regulatory Capital at the Point of Non Viability” sets out a proposal aimed at “enhancing the entry criteria of regulatory capital to ensure that all regulatory capital instruments issued by banks are capable of absorbing losses in the event that a bank is unable to support itself in the private market.”

Amongst other issues addressed, the response to the consultative document highlights why the controlled winding down procedure also constitutes a means whereby losses could still be absorbed in the event that a bank is unable to support itself in the private market.

Keywords: counter cyclical buffers, liquidity risks, pro cyclicality, loan loss provisions, financial crises, bank, regulation, capital, insolvency, financial crises, moral hazard, Basel III