1.

The 2007-2010 crisis was the worst global financial crisis after the great depression, as
most economies will agree. The capital base of banks was compromised during both
events, which led to bank regulations and their much-needed improvement of the quality
of capital base to become stronger during economic crisis. During the great depression,
many bank failures were due to the stock market crash. The failures began as debtors
defaulted on loans and depositors withdrew their deposits. Income kept decreasing, and
prices increasing. Bank failures also increased as they needed loans to be paid, but no
borrower had the money. Federal Reserve could not react because the Federal reserve
Act required 40% gold backing of Federal Reserve notes issued, and during this time
they hit the limit.
In the 2007-2010 crisis, many banks failed to maintain high quality capital base even
prior to the crisis. During the crisis investors were hesitant, which led to the continuing
failure of banks building their capital base. Government support was necessary to attain
the required capital base. New regulations were desperately needed to improve banks
capital base requirements to be able to sustain hard economic times.
2. Basel regulations wished-for more conservative measures for the counterparty credit risk
calculations. This was obtained after historical data and economic and market stress
were included in the calculations. To calculate the correlation between a firm’s financial
asset value and the economy a multiplier of 1.25 was applied, which means they needed
more capital.

3. The leverage-ratio gives a non-risk-based measure. The higher the leverage the lower
the possibility of loss in a rough time. In Basel III the leverage regultions have two
objectives, avoid differing methods of calculating risk-weighted assets and create a level
playing field globally. By trying to keep a low leverage ratio, the money from lenders
would decrease.
Off balance sheet is a form of financing in which large capital expenditure are kept off
balance through different method. Most likely used to keep leverage ratios low. By
including the off-balance sheet investors can examine the true leverage ratio of banks. If
the off-balance sheet leverage ratio is higher than the normal one that could mean the
bank does a lot of financial commitment in the market.

4. To limit counterparty credit risk banks are required to use historical data when estimating
correlation assumptions and volatility in internal risk measurement model. Basel III
requires banks to also include economic and market stress in the model. For a further
measure we also need a quantifying method such as a calculation of the expected loss
of the counterparty, for this we can use probabilities of default, exposure at default and
loss given default. Counterparty risk management policy can be implemented after
analyzing these results.

5. The liquidity framework aims to improve banks liquidity problems in the market. By
setting rules for the asset and liability sides of the bank balance sheet, regulations can
moderate liquidity risk. In Basel III, the 2 main liquidity ratios are liquidity coverage ratio
(LRC) and net stable funding ratio. The main use of liquidity ratios is to ensure banks
maintain a level of assets that can be converted to cash in a short amount of time.
6. Basel III will the restrictions and specificity to male the framework more difficult to
implement globally. Basel III can be an obstacle to some developing or emerging
countries. Developing economies will be affected by the liquidity coverage ratio, the
high-quality assets that can be converted to cash quickly are in short supply in these
countries. Counterparty risk will also be unfair to emerging countries given that
developed countries can control risk by hedging, but these alternatives are only available
in modern financial countries.

Emerging countries would have a hard time following the Basel III they will suffer a lot
because of little to no solutions to counterparty risk. Thus, domestic regulations to
supplement Basel III are a must to maintain a competitive ability.