The global financial crisis that began in mid-2007

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The global financial crisis that began in mid-2007 illustrated how quickly and severely liquidity risks can crystallize and certain sources of funding can evaporate, compounding concerns about the valuation of assets and capital adequacy. A number of banking organizations have experienced large losses, most of which were sustained in the banks' trading accounts. These losses have not arisen from actual defaults, but rather from credit agency downgrades, widening credit spreads, and the loss of liquidity. 

In July 2009, the Basel Committee finalized a package of proposed enhancements to Basel II to strengthen the regulation and supervision of internationally active banks. And in September 2010, the committee announced a third accord, named Basel III, designed to strengthen the regulatory capital framework. The new program aims to build up capital buffers that can be drawn down in periods of stress, strengthen the quality of bank capital, and introduce a leverage ratio requirement to contain the use of excess leverage. 

Examine the Basel III regulatory framework at http://www.bis.org/publ/bcbs189.pdf. 

Page 54 discusses the Capital Conservation Buffer which was set up to make sure that banks have adequate capital to handle periods of stress. Read the sections on the CCB. What kinds of things can banks do to rebuild or raise new capital? What kinds of accounting tricks cannot be used to hide capital problems? Perform research and find how effective these requirements have been given the global economy is still in recovery from this financial crisis. Argue why or why not these regulations might stop future bank runs and spread of contagion.

 

 

Reference no: EM13709348

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