What Is the Role of Basel III in Creating Sufficient Risk Management in the Banking Sector?

Abstract

This paper attempts to investigate the reasons that lead bankers into establishing Basel III agreement and, second, to examine whether it would be able to bring about prudent risk behavior among banks. Basel III was the third set of regulations, following Basel I and Basel II, and was developed in response to the financial crisis. The measures developed by the Basel Committee on Banking Supervision aimed to reinforce banks liquidity, to protect the banking sector from systemic risks, as well as to solidify the regulation. Although most of the fundamental problems, that were responsible for the global financial crisis, had already been identified with Basel I and Basel II, Basel III did not offer solutions for many of them. In fact, Basel III inherited some of the weaknesses of Basel II, as the concept that banks should hold more capital against a risky asset. Regarding the risk protection, the challenge was to reduce unforeseeable risks, whereas Basel III focused mostly on the foreseeable ones.

Keywords: Banking, Risks, Globalization, Crisis.