Preparing for Basel IV (whilst commending Basel III) : why liquidity risks still present a challenge to regulators in prudential supervision ( Part II)

Ojo, Marianne (2010): Preparing for Basel IV (whilst commending Basel III) : why liquidity risks still present a challenge to regulators in prudential supervision ( Part II).

Abstract

Whilst the predecessor (Part I) to this paper addresses criticisms and challenges which have arisen in response to recent Basel Committee's initiatives aimed at addressing capital and liquidity standards, the present paper highlights further measures which are being introduced by the Basel Committee to address such criticisms and challenges.

As well as presenting and drawing attention to proposals which could serve as means of addressing challenges presented by liquidity risks, Part I of the paper concludes with the result that market based regulation is an essential and vital tool in the Basel Committee's efforts to address some of the challenges presented by liquidity risks. The present paper highlights the Basel Committee's acknowledgement of this conclusion. Furthermore, it draws attention to other areas which are considered to constitute fertile substrates for purposes of future research.

This paper will also illustrate why the potential of banking regulations and disclosure requirements to impact risk taking levels is not only dependent on certain factors such as the dissemination of information to appropriate recipients, appropriate volume of disseminated information, when to disseminate such information, but also on other factors such as ownership structures and effective corporate governance measures aimed fostering monitoring, supervision and accountability.

In arguing that additional leverage ratios which have recently been proposed by the Basel Committee will play a key role in facilitating the diversification of banks‘ liquid assets – via the new liquidity standards (Liquidity Coverage Ratio and the Net Stable Funding Ratio), contribution is also made to the current discussion on the resilience of the banking sector – albeit from the perspective of the stabilisation of the entire system.

• Item Type: MPRA Paper
• Language: English
• Keywords: liquidity risks; systemic risks; capital; standards; Basel III; moral hazard; disclosure; information; Liquidity Coverage Ratio (LCR); Net Stable Funding Ratio (NSFR); accountability; corporate governance
• Subjects: K - Law and Economics > K2 - Regulation and Business Law; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E32 - Business Fluctuations ; Cycles; G - Financial Economics > G3 - Corporate Finance and Governance; D - Microeconomics > D8 - Information, Knowledge, and Uncertainty; G - Financial Economics > G0 - General > G01 - Financial Crises

References

Baldwin R, “The New Punitive Regulation” May 2004 Volume 67 No 3 Modern Law Review

Basel Committee on Banking Supervision, „Basel III: A Global Regulatory Framework For More Resilient Banks and Banking Systems“ http://www.bis.org/publ/bcbs189.pdf

Basel Committee on Banking Supervision, „Basel III: International Framework for Liquidity Risk Measurement, Standards and Monitoring“ December 2010 Bank for International Settlements Publications <http://www.bis.org/publ/bcbs188.pdf>

Basel Committee on Banking Supervision, Consultative Document of the Basel Committee on Banking Supervision „Proposed Enhancements to the Basel II Framework“, January 2009 Bank for International Settlements Publications <http://www.bis.org/publ/bcbs150.pdf>

Basel Committee on Banking Supervision, The finalised proposals for enhancing the Basel II Framework: „Enhancements to the Basel II Framework“ July 2009 „Changes to the Pillar 3 Disclosure Requirements“ Bank for International Settlements Publications <http://www.bis.org/publ/bcbs157.pdf>

Bodenstedt M, Rösch D and Scheule H,“ The Path to Impairment: Are Structured Finance Ratings Perspicacious?“ Paper presented at the INFINITI Conference on International Finance13-14 June 2011

Final Report of the Macroeconomic Assessment Group (established by the Financial Stability Board and the Basel Committee on Banking Supervision) „Assessing the Macroeconomic Impact of the Transition to Stronger Capital and Liquidity Requirements, Bank for International Settlement Publications December 2010

Hannoun H, „Towards a Global Financial Stability Framework“ Bank for International Settlements Publications <http://www.bis.org/speeches/sp100303.pdf>

Kim D and Santomero A, ‚Risk in Banking and Capital Regulation’ 1994 Journal of Finance 43

Laeven L and Levine R, ‚Bank Governance, Regulations and Risk Taking’ 2008 Journal of Financial Economics

Lingo M, Eisl A and Elendner H, „Re-Mapping Credit Ratings“ Paper presented at the INFINITI Conference on International Finance13-14 June 2011

Molyneux P, Shaeck K and Zhou T, „Too Systemically Important to Fail in Banking“ Paper presented at the INFINITI Conference on International Finance13-14 June 2011

Ojo M, „Building on the Trust of Management: Overcoming the Paradoxes of Principles Based Regulation http://mpra.ub.uni-muenchen.de/22500/1/MPRA_paper_22500.pdf and http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1600504

Ojo M, „The Role of the External Auditor in Corporate Governance: Agency Problems and thManagement of Risk http://mpra.ub.uni-muenchen.de/15989/1/MPRA_paper_15989.pdf and http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1427899

Papanikolaou N and Wolff C„Leverage and Risk in US Commercial Banking in the Light of the Recent Financial Crisis“ Paper presented at the INFINITI Conference on International Finance13-14 June 2011.

Posch P and Löffler G, „With Bail-outs There is No Bad News: Market Reactions to House Price Releases.“ Paper presented at the INFINITI Conference on International Finance, Trinity College Dublin, 13-14 June 2011

Scott H, „Reducing Systemic Risk Through the Reform of Capital Regulation“ Journal of International Economic Law 13(3), 763–778

Shleifer A, „Alternative Views of the Crisis“ Keynote Speech during the Plenary Session of the 9th INFINITI Conference on International Finance, Trinity College Dublin, 13-14 June 2011

Tarullo D, „Capital and Liquidity Standards“ June 16 <http://www.federalreserve.gov/newsevents/testimony/tarullo20110616a.htm>

Walter S, „Basel III: Stronger Banks and a More Resilient Financial System“ <http://www.bis.org/speeches/sp110406.pdf>