The Global Financial Crisis

True. I believe risk management has become one of the primary concerns for bank management. Banks deal with an overwhelmingly large number of exchange securities, for example, ( loans, treasury bills, forex trading, ect...) This causes bank managers to have skills to properly analyse and manage what securities they trade and what type of contracts they enter into, ( such as in hedging etc...). If banks do not shift their focus on such new financial instruments they might go bankrupt as a result of excessive risks in such securities. Hence the focus of bank supervision has shifted to risk management, rather than on capital requirements. Although both are key to running a successful bank.

Investment Banking is now at a crucial junction, where Investment and Commercial Banking are splitting up due to the ring fence which is being built around these two banking areas. As well, the new upcoming regulation, Basel III, will have a huge impact in the investment banks, with higher liquidity and capital requirements, in order to increase solvency and stability in financial industries.

A good regulation should be able to be flexible. For instance, when the economy is safe and flourishing, the regulation should be more relaxed and have decreased barriers for banks in terms of the minimum requirement for capital reserves. And when the economy is floundering, a stricter approach should be used. For example, the minimum requirements for requirement for capital reserves should be increased.

Recent studies have investigated the impact of the 2007-2009 financial crises on banks’ capital. Berger and Bouwman (2011) emphasised the importance of capital during financial crisis. Their empirical study concludes that banks with solid capital base have some benefits during the crisis than those that are poorly capitalised. Well capitalised banks are more able to withstand the shocks due to liquidity squeeze, and therefore had higher chances of surviving the crisis period. Other benefits accrued to well capitalised banks include increase in their market share and profitability, as customers withdrew their funds from less capitalised to a well-capitalised banks. This conclusion was also reinforced by a recent empirical study conducted Olivier de Bandt et al (2014) on a sample of large French banks over a period of 1993 – 2012. Similarly, Gambacorta and Marques-Ibanez (2011) demonstrate the existence of structural changes during the period of financial crisis. They conclude that banks with weaker core capital positions, greater dependence on market funding and on non-interest sources of income restricted the loan supply more strongly during the crisis period. Using a multi-country panel of banks, Demirgüç-Kunt, Detragiache and Merrouche (2010) find among others results, that during

The primary measure used by regulators and analysts to measure a bank’s capital strength is the Tier 1 capital ratio. Analyzing this ratio indicates the strength and the bank’s ability to

Moving to a customer point-of-view in regards to decreases in demand deposits. With surges in withdrawals, such as IndyMac Bank in 2008 (Lange, et. al, 2016, pp 129-130), a weakening capital position could indicate to investors and depositors that their value held with the bank could possibly decrease. This could result in high levels of customers withdrawing their funds could putting immense pressure on the bank and its monetary levels to stay profitable.

Basel III pillar 1 significantly enhance the core capital adequacy ratio required level for the banking sector, the new standard requires banks within eight years, in phases to constitute a capital requirement of ordinary shares increased to 7%, the capital adequacy level standard rates are need to set at 6%, which the banks are required to reserve not less than 2.5% of the bank 's risk capital buffer funds, if the bank failed to meet the requirements, the bank dividends, share buybacks and bonuses and other acts will be subject to have strict restrictions. At the same time, the agreement also requires banks to maintain 0-2.5% of the counter-cyclical regulatory capital, in order to effectively prevent hidden risk of bad debts cause by excessive lending during the boom years, and to help banks when economic downturn. Next, total assets core capital is called leverage ratio, leverage ratio of capital adequacy ratio is an important indicator of regulatory

This study presents a comprehensive assessment of the balance sheet in commercial, insurance and investment institutions. The balance sheet is the list of a bank’s assets and liabilities. It provides information to investors about the firm’s financial position, performance and changes in financial position (Orens, & Lybaert, 2010). Banks are required under the Basel II Accord to come up with data inferring their level of exposure to risk and by those figures a minimum capital requirement is assigned (Basel Committee, 2006). The Basel II Accord is a cornerstone of a formal quantitative framework of risk management (Basel Committee, 2006). It is a standardized new requirement for financial institutions to retain a minimum level of capital to guarantee that obligations are met (Basel Committee, 2006).

Swiss regulators have established themselves as being very careful regarding the demands of the country’s largest banks along with their general capital ratio norms, which are known to be highly stringent globally. This opens room for imposing stricter leverage ratio requirements over banks. To evaluate the impact of a rule making its obligatory for banks to uphold a leverage ratio ranging between 6-10%, in the third quarter of 2013 UBS reported a leverage ratio of 4.2% where as Credit Suisse reported a figure of 4.1% (at the banking industry level).

Capital in banks play an essential role of helping banks remain solvent by absorbing losses caused due to stress conditions. In this paper, we shall analyse how capital helps banks manage their risk, what led to banks failing during the financial crisis and what measures have been adopted to avoid (or better manage) such situations in future.

The Basel Committee on Banking Supervision has developed a regulatory capital framework for operational risk measurement and introduced three approaches: the Basic Indicator Approach (BIA), the Standardized Approach (SA) and the Advanced Measurement Approach (AMA).The identification and measurement of operational risk can be viewed as following either the top down approach or the bottom up approach depending on the method used to calculate the risk charge. In the top down approach, the financial data is extracted from the Balance Sheet and Profit and Loss statement. This method may not result in the proper capturing of risks nor does it help in risk mitigation. This approach corresponds with the Basic Indicator Approach and the Standardized Approach of Basel II Accord. The third approach of the Accord i.e. Advanced Measurement Approach, is consistent with bottom up approach in which the regulatory capital requirement will be defined by the estimate generated by the internal operational risk measurement system (Rajeev, 2004).

Subsequent to the implementation of Basel III in South Africa on 1 January 2013, the Basel Committee on Banking Supervision ("BCBS") issued revised requirements in respect of a wide range of matters which necessitated amendments to our regulations. The Regulations now cater for the changes to capital disclosure requirements, changes to the Liquidity Coverage Ratio ("LCR"), requirements related to intraday liquidity management and public disclosure requirements related to the LCR.

backdrop of banking crisis due to highly undercapitalization deposit taking banks; weakness in the regulatory and supervisory framework; weak management practices; and the tolerance of deficiencies in the corporate governance behaviour of banks (Uchendu, 2005). Banking

to strengthen the regulatory and accounting frameworks aimed at increasing the resilience of the institutions. However, higher capital standards, stricter liquidity and leverage ratios and a more cautious approach to risk are likely to raise the funding costs of banks. Compliance with Basel III stipulations along with the credit needs of a growing economy will require banks to tap various avenues to raise capital. Broad estimates suggest that for public sector banks, the incremental equity requirement due to implementation of Basel III norms by March 2018 is expected to be approximately `750-800 billion. Meeting these capital requirements will entail the use of innovative and attractive market based funding channels by the banks. The

Ensuring robustness of financial models and the effectiveness of all systems used to calculate market risk. Liquidity risk is the potential inability to meet the bank’s liabilities as they become due and are managed through caps on the net asset calculations in the various time buckets. Interest rate risk is the risk where changes in market interest rates might adversely affect a bank’s financial condition. A long term impact of changing interest rate is on banks net worth since the economic value of bank’s assets, liabilities and off balance sheet positions get affected due to variation in market interest rates.