Was Basel III Necessary and Will it Bring About Prudent Risk Management in Banking?

Abstract:     
This paper assesses whether Basel III was necessary and would be able to bring about prudent risk behaviour among banks. Basel III aimed at setting new global standards to address both firm specific and general systemic risks by raising the quality of capital to position banks to better absorb losses on going concern basis, monitor leverage and also improve banks liquidity. However, it did not fully address many of the factors that were responsible for the global financial crisis and the fundamental problems identified with Basel I and Basel II.

The risk weighting system suffers from the assumption of portfolio invariance and has not been refined. Basel III did not address the over reliance on external rating agencies in the capital framework and also the ethical issues such as corporate governance, account manipulation and full disclosures. The issue of reliance on market disclosure to aid the market in the assessment of quality of capital across institutions has also not been resolved.

Number of Pages in PDF File: 19

Keywords: Basel III, Risk Weighted Assets, Corporate Governance, Risk Management

JEL Classification: G21, G28, G38

working papers series