From Basel I to Basel III In this section, we will describe the Basel Committee’s approach to

The general objective of this policy paper is to deeply understand the latest and most influential financial reforms and the current financial environment in U.S through relatively comprehensive analysis with regard to the Dodd-Frank Act. In doing so, I move forward to provide some suggestions on improving the relevant legislature.

One of the primary factors that can be attributed as to have led the recent financial crisis is the financial deregulation allowing financial institutions a lot of freedom in the way they operated. The manifestation of this was seen in the form of:

Basel III is a global comprehensive collection of restructured regulatory standards on bank capital adequacy and liquidity. It was developed by the Basel Committee on Banking Supervision to strengthen the regulation, supervision and risk management of the banking sector (bis.org, 2010). It introduces new regulatory requirements on bank liquidity and bank leverage in response to the financial downturn caused by the Global Financial Crisis. Stefan Walter, Secretary General of the Basel Committee on banking supervision said in November 2010:

Firstly, the Dodd–Frank Act pushes forward the reformation of America's financial regulatory system. Several new regulatory authorities are set up to enhance the government supervision and administration of the industry. The Financial Stability Oversight Council is established to identify material risks to financial stability, with the support from Office of Financial Research. Moreover, Fed is entitled to exercise additional superintendence beyond banks.

Since the onset of the financial crisis 2008, the sovereign debt crisis in western economies and the new financial regulation with Basel III coming up, the financial industry faces the challenge of reinventing itself. The ring-fence for Commercial and Investment Banking, and new economic and regulatory capital requirements will determine the kinds of products banks will be able to distribute. It will have a huge impact in the Investment Banking business, which will suffer tough regulation and supervisory procedures. At the same time, credit risk models will be reviewed because they have failed to predict the crisis of 2008. The current financial and economic crisis doesn’t have any precedent in the past.

The reality of systemic risk made the task of regulating the financial system increasingly complicated, as the crises aren’t contained in one country or market. The extreme inter-dependence between the different agents is the main reason why we need regulation today, as some misconducts can cause a domino effect, affecting markets globally. The structure of the banking system in itself explains this process. In the finance industry, banks borrow money from other banks. If one bank fails, the one who lent the funds in the first place might also follow the same path, creating panic in the markets. The government’s first prerogative is to protect its citizens from these

The Dodd-Frank Act utilizes several different measures to determine the level of systemic risk in the financial system. Regulators are encouraged to consider the following criteria when assessing the systemic risk of a firm (pgs. 131-132):

Basel III is another law implemented that will place additional strain on Banks. Basel III is a set of reform measures, developed by the Basel Committee on Banking Supervision. It is a framework used to strengthen risk management and a banks ability to absorb shocks from financial and economic stress. Basel III implemented new tier 1 capital requirements, new minimum leverage ratio requirements and new liquidity coverage ratios requirements. Community banks enjoyed a small victory by delaying the final implementation requirements for Basel III to March 31, 2019.

The subprime mortgage crisis is a huge example of a financial disruption that changed the ways that financial markets are regulated. Since bankers were giving out subprime mortgages that the house buyers could not repay, the house buyers all obtained way too much debt that they could not pay back. Because people couldn’t pay back their debts then they got foreclosed. Since this screwed up our entire economic status there have been a lot of regulations on that market.

With this title two new government departments are created The Financial stability Oversight Council and the Office of Financial Research. The authority of the Board of Governors of the Federal Reserve System is it expanded also to allow them to supervise nonbank financial companies and certain bank holding companies that could affect the health of the country’s economy.

In the aftermath of the 2008 financial crisis, Congress recognized the need to regulate nonbank institutions. Many of the financially distressed institutions were not regulated by the same standards bank holdings were. As a result The Financial Stability Oversight Committee was created under Title I of the Dobb-Frank Wall Street Reform and Consumer Protection Act. The committee was signed into law by Barack Obama on July 21, 2010 and serves three primary purposes. One is to authorize and determine nonbank financial institutions that if under material financial distress or failure, can threaten the financial stability of the United States. The designated institutions are referred to as systematically important financial institutions (SIFIs) and are subject to the regulation and supervision of the Federal Reserve System (Board of Governors). Another purpose of the committee is to promote market discipline and eliminate the expectation of companies stakeholder’s relying on the U.S. government bailout as safeguard from failure or loss. Last but not least the committee is also expected to recommend standards and safeguards for U.S. and global financial systems. In the executive summary of the 2014/15 annual reports, the committee continues focusing on three areas of financial risk: cyber security, foreign markets and the housing finance reform.

The post-crisis regulatory framework has shifted from a framework which was centred on a single regulatory constraint – the risk-weighted capital ratio – to one with multiple constraints. In addition to the risk-weighted ratio, the post-crisis framework also includes a leverage ratio, large exposure limits and two liquidity standards (ie the Liquidity Coverage Ratio and the Net Stable Funding Ratio). And supervisory stress testing is playing an increasingly important role across a number of jurisdictions. Each regulatory measure has strengths and weakness. The multiple metrics framework is more robust to arbitrage and erosion

After the collapse of Lehman Brothers, the G-20 became the most important forum for economic cooperation . Its positive impact in the realm of financial regulation can be determined by two main results. Firstly, the most important emerging nations were included in the premier league, thus rebalancing most part of worldwide financial authorities, increasing the number of players who now participate in financial regulation. Secondly, the G-20 started several initiatives regarding worldwide financial regulation. It set important deadlines that in some cases were not met. Even though the G-20 is a political organization, the management of the global financial regulatory agenda has been mostly performed by the IMF and FSB. The IMF performed an important task via its Financial Sector Assessment Program (FSAP). The FSAP became in 2010 an important regular feature within 25 nations, hence providing a comprehensive assessment of a nations’ financial stability. The FSB has a multidimensional role and is still evolving. It established, usually under the request of the G-20 authorities, several working groups, as well as it manages tasks in numerous fronts. Nonetheless, the actual effort of rulemaking and standard-setting rests at the specialized global authorities’ realm. Several of its reports are directed to global bodies, which have FSB memberships, such as the IOSCO and the Basel Committee. Therefore, the contribution given by the

The risk-weighted assets will increase sharply since Basel 3 has increased the capital adequacy ratio of the banks to defend against the operational crisis in the future . Also , Basel 3 updated the standard of the main factor of Tier 1 as well as Tier two capital whose baseline has raised from 4% to 6% . Although transition period of carrying out Basel 3 regulation is long , the banks with lower capital adequacy ratio might suffer from the huge pressure of supplying sufficient capital .

Minimum capital requirements, which sought to develop and expand the standardized rules set out in the 1988 Accord.