Great expectations, predictable outcomes and the G20's response to the recent global financial crisis

Ojo, Marianne (2011): Great expectations, predictable outcomes and the G20's response to the recent global financial crisis.

Abstract

The meeting of the Governors and Heads of Supervision on the 12 September 2010, their decisions in relation to the new capital framework known as Basel III, as well as the endorsement of the agreements reached on the 26 July 2010, once again, reflect the typical situation where great expectations with rather unequivocal, and in a sense, disappointing results are delivered. The outcome of various consultations by the Basel Committee on Banking Supervision, consultations which culminated in the present Basel III framework, also reflect the focus on measures aimed at addressing problems attributed to Basel II, that is, measures aimed at mitigating pro cyclicality. This is rather astonishing given one critical lesson which has been drawn from the recent Financial Crisis: namely, that capital measures on their own, were and are insufficient in addressing and averting the Financial Crisis. Furthermore, banks which have been complying with capital adequacy requirements could still face severe liquidity problems.

As well as an increase of the minimum common equity requirement from 2% to 4.5%, the recent agreement and decisions of the Governors and Heads of Supervision also include the stipulation that banks hold a capital conservation buffer of 2.5% - hence consolidating the stronger definition of capital (as agreed in the previous meeting held by the Governors and Heads of Supervision earlier in July 2010).

• Item Type: MPRA Paper
• Language: English
• Keywords: pro cyclicality; liquidity; capital; Basel III; countercyclical; forward looking provisioning; financial regulation; financial crises
• Subjects: K - Law and Economics > K2 - Regulation and Business Law; D - Microeconomics > D8 - Information, Knowledge, and Uncertainty; G - Financial Economics > G0 - General > G01 - Financial Crises; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles

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