Basel III: A Solution to Prudent Risk Management
12 Pages Posted: 3 Sep 2012
Date Written: September 3, 2012
Recent financial crises (2007/2008) have demonstrated many weaknesses in the global regulatory framework of Basel I & II and risk management practices (Auer and Von Pfoestl, 2011). The underlining problem relates to shortcoming in the regulation of systematic risk and exposed moral hazard that is associated with systematically important institutes (Banks). As, a result governments were strained to bail-out these large and complex financial intermediaries as they feared the unforeseeable consequence of their default (Co-Pierre, 2011).
To overcome these shortfalls, the G20 has endorsed the new regulatory framework, referred to as Basel III at their November 2010 Summit in Seoul (Leach, Hall, Sayer, Williams, Lindenbergh, Ott, 2010).
This paper explores the necessity of Basel III. In addition, how it can overcome the shortfalls of Basel I & II with an aim to avoid financial crises in future. Furthermore, would it be able to bring about prudent risk management among banks?
The paper concludes that Basel III can overcome the shortfalls of Basel I and Basel II as its framework brings many improvements and stringent monitoring criteria for banking industry globally. In addition, it is a solution to prudent risk management.
However, Basel III still faces challenges in its implementation proposed by the Basel Committee on Banking Supervision.
Keywords: financial crises, risk management, Basel I, Basel II, Basel III
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