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This article features the major economic powerhouses such as the US, European Union and Japans and

their failure to fully

implement bank-capital rules drawn up to prevent a repeat of the financial crisis in 2008, that followed the 2008 collapse
of Lehman Brothers Holdings Inc. Preliminary assessments of the EU, the U.S. and Japan have identified areas of
divergence with the Basel accord, the group said. There are key areas where domestic implementation may be weaker
than the globally-agreed standards.
There has been a deadline set by the Basel committee for nations to implement the rules before January 2013 stating
more than triple the core capital that lenders must have to avoid insolvency
EU and U.S. regulators have said that they will be vigilant in policing how each party applies the Basel III standards, which
are scheduled to take full effect in 2019.
Regulators announced last year that the group would organize a peer review team
It was announced by this peer review team that the EU text is criticized as being less precise than Basel 3 in defining what
kinds of securities can count towards core capital
The Basel committees decision to review proposed liquidity rules for lenders shows that taking a bit of time to get things
right is better than rushing Sharon Bowles, chairwoman of the European Parliaments economic and monetary affairs
committee said
The U.S. plans to ban banks from relying on assessments by credit-ratings companies to calculate their capital
requirements may also impede compliance with Basel III.
For the U.S. Potential concerns include that the nations regulators may apply the rules to too few banks. Thus, ending up
with inconsistencies throughout the nation.

Issues flagged for Japan include that the nation has yet to publish rules, which are scheduled to be applied from 2016
requiring banks to build up capital buffers during credit booms. So what is a credit bloom? A credit boom or "lending
spree" is the rapid expansion of lending by financial institution
Flexible implementation of previous rounds of Basel rules in the EU has allowed European lenders to hold less capital
against some assets than their U.S. counterparts.
Initial examinations have shown that there is substantial unexplained variation in how banks carry out this so-called risk
weighting on securities they intend to trade
Functions of capital
1. To absorb unanticipated losses with enough margin to inspire confidence and enable the FI to continue as a going
2. To protect uninsured depositors in the event of insolvency and liquidation. Capital protects non-equity liability holders
against losses.
3. To protect FI insurance funds and the tax-payers. An FI's capital offers protection to insurance funds and ultimately the
taxpayers who bear
4. To protect the industry against increases in insurance premiums. By holding capital and reducing the risk insolvency, an
FI protects its industry from larger insurance premiums.
5. To fund new assets and business expansion. FIs have a choice, subject to regulatory constraints, between debt and
equity to finance new projects and business expansion.

Basel 2
Pillar 1 covers regulatory minimum capital requirements for credit, market, and operational risk
Credit risk risk that the borrower will not meet commitments when due.
Market risk includes general market risk, changes in the overall market for interest rates, equities, foreign exchange and
commodities, and specific market risk, risk that the value of a security will change due to issuer specific factors, e.g. credit
worthiness of issuer.
Operational risk - risk of loss from inadequate or failed internal processes, people and systems or from external events.
Such as internal/external fraud, employment practices and workplace safety, damage to physical assets, business
disruption and system failure.
Pillar 1 of the new capital framework revises the 1988 Accords guidelines by aligning the minimum capital
requirements more closely to each bank's actual risk of economic loss.
Pillar 2 - Supervisors will evaluate the activities and risk profiles of individual banks to determine whether those
organisations should hold higher levels of capital than the minimum requirements in Pillar 1 would specify and to see
whether there is any need for remedial actions.
Pillar 3 -leverages the ability of market discipline to motivate prudent management by enhancing the degree of
transparency in banks public reporting to shareholders and customers.

US Capital Regulation
U.S. banks are required to comply with two sets of capital regulation:
1. The capital/asset (leverage) ratio: place banks into one of the five categories
2. The risk-based capital requirements: comply with the Basel I regulation (only a few largest commercial banks are strictly
required to follow Basel II)

Basel 3
What is it?
Twenty-seven countries are negotiating new banking regulations that would limit the risk at the worlds largest financial
companies. The rules are expected to insist that banks hold higher levels of capital to protect against future losses
Regulators are trying to create a more resilient banking system to prevent against future financial crises
Whats the impact?
Overly restrictive rules could make it more expensive for people to borrow money,
This is potentially crimping economic growth. Regulators counter that new rules will make the banking system safer and
help restore confidence in financial markets

Significant Changes from Basel II to Basel III
Common equity has to be at least 4.5% of total Risk Weighted Assets, after deduction
This is raised from 2% in Basel II
Tier 1 Capital has to be at least 6% of total Risk Weighted Assets
The minimum Total Capital ratio is still 8%
SIFIs must have higher loss absorbency capacity than other FIs to reflect the greater risk they expose to the financial
Additional common equity Tier 1 capital requirement of 1% -2.5%.
Link 1
One of the reasons why they were criticised was due to the 2008 financial crisis which was detrimental to the economy,
hence they want to avoid a reoccurrence of such an event.
The Basel ii accord was insufficient in minimizing the impact of such a collapse, consequently Basel 3 was required, yet the
economic powerhouse still failed to fully implement Basel 3. Hence leading to them being criticized, as they can influence
the rest of the worlds nations
Link 2
In the midst of the sub-prime mortgage crisis and following the collapse of Lehman brothers, regulators increased their
capital requirement. Link to the previous paragraph
Initial examinations have shown that there is substantial unexplained variation in how banks carry out this so-called risk
weighting on securities they intend to trade, the group said today.
The objective of the accord is to ensure that financial institutions have enough capital on account to meet obligations and
absorb any unexpected losses
Having said that flexible implementation of previous rounds of Basel rules in the EU has allowed European lenders to hold
less capital against some assets than their U.S. counterparts.
But then without consistent calculation of the risk weighted asset between banks/countries, it can be manipulated and
calculated differently due to the loose rules set. Subsequently when banks disclose their total capial ratio it may not
reflect their actual ability to absorb losses.