Article Review 2 - Basel III what and why?

Introduction Paragraph:
This article was published in 2016, written by Jonas Niemeyer. In titled with Basel II what and
why? The writer of this article is exerting to explain and address the issues like what the Basel
Committee is, the background to standard, what these standard mean, what are the differences
between old and new regulations, what should be remain constant and why these are important
for Sweden and Swedish Banks.
After the global financial crisis which began in 2007, many banks from different countries
strengthen their policy. This article by Jonas Niemeyer explains about what the Basel Committee
is, the background to the stricter standards, what these standards mean and why they are
important for different bank and financial institutions.
Purpose of the Article:
Authors in this article sates about that the Basel Committee is a committee of Central Bank and
Supervisory authorities from different countries to promote global financial stability by
improving and harmonizing both bank and the supervision of the banks. Its main objective is also
to promote banks' sound risk management practice. The Basel Committee was set up in 1974 to
improve global financial stability by creating a forum for cooperative between countries on
banking supervisory issues. The central bank governors in the G10 countries decided at the end
of 1974 to create a committee that would later be called the Basel Committee
This article also helps to know some of the new ides like whether the old regulation is sufficient
or not, what extra rules or regulations are implemented through Basel III and what are some of
the limitation that Basel III also failed to address. The Basel III is inbound by laws and
regulations for bank and financial institutions that can divert from like 2007 crisis. The
initialpurpose of the committee was to ensure that all internationally active banks were under
supervision and that the supervision was sufficient and consistent across borders. The aim of the
Basel Committee on Banking Supervision, normally referred to as just the Basel Committee, is to
promote global financial stability by improving and harmonizing both bank regulation and the
supervision of banks. Another purpose is to promote banks’ sound risk management practices.
The committee achieves this by being the main standard-setter for global banking rules and by
being a forum for cooperation on banking supervisory matters.
In this article there are much new ideas about the consequences, In 1980s, the Latin America
overcame financial crisis and then Basel committee realized that the focus on supervisory is not
sufficient for controlling further crisis situation. Therefore, the committee decided to introduce
Capital Adequacy Ratio at least 8% of total capital. Similarly, the committee had also stipulated
the risk exposers of lending (Loan & Advances) where, 100% of corporate lending, 50% of
mortgage lending, 20% of interbank lending and 0% of certain government securities. Under that
agreement, the members (countries) had to implement the new capital requirement rules by the
end of December 1992.
Research Methodology:
This article was fully based on the first-hand Data which shows about 30 banks of the world, was
designated as the global systematically important banks (G-SIBs) that must have applied a
regulation of additional capital buffer of between 1-2.5% of risk weighted assets where the
capital buffer must have included CET 1 capital. Similarly, the Basel III introduced the two
liquidity requirements for managing liquidity crisis which are; (i) Liquidity Coverage Ratio for
short term need and (ii) Net Standing Fund Ratio for long term need. The Basel committee
introduced a leverage ratio as a standard capital requirement of 3% but G-SIBs should have
maintained at higher level. The bank should have enough capital to cover total assets of bank's
balance sheet and some off-balance sheet items. Later on, the Basel III introduced a
harmonizedregulatory framework for large exposer to individual counterparties where the bank
is not allowed to have exposer that exceeds 25% of Tier 1 capital.
My Opinion:
After reading this article, the findings are neutral to the readers i.e. neither much important nor
less important. Reader gets the neutral view point in this article. Basel II had more focused on
the risk weighted capital requirement but the Basel III has focused on the counter cycle buffer,
leverage ratio, liquidity coverage ratio and net stable funding ratio where the Basel III
regulations are more clear and stricter. Talking about Swedish Banks, although the Swedish
economy is small in portion of rest of the world but there were greater impacts in global crisis of
2007-2011. There were some critical reasons behind it;
(i) high dependency on foreign sources of funds

(ii) large amount of total assets (400% of Swedish GDP)

(iii) market is highly concentrated so there is large exposure to one another

(iv) market participants, banks and investors perceive that Swedish banks have implicit public-
sector guarantee.

Eventually, as the recommendations, the Basel committee should comply the risk weighted
capital at least 12%, liquidity coverage ratio not only in total but separately USD & EUR, and
leverage ratio at least 5% so that the Global Financial system will encounter the future financial
crisis in better way.