The Global Financial Crisis

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The global financial crisis has raised many concerns for the need to restructure the approach of risk and regulation in the financial sector (KPMG 2011). Figure. 4 has shown the structures of Basel III. It aims to increase the capital and liquidity of banks and therefore maintaining the stability in banking sector with full effect in 2019 (Banks For International Settlements 2011). EUROPE - Preparedness On 26 June of 2013, Capital requirement regulation (CRR) and directive(CRD) has been adopted for Basel III in Europe. Basel III permits the capital buffer increase gradually to 2.5% in 2019 (Banks For International Settlements 2011). There is minor deviation in adapting this approach in Europe. Given that small institution may adapt Basel…show more content…
Secondly, banks will have a more accurate estimate of liquidity by doing "cash-flow forecasts and portfolio analysis"(Philipp et al. 2010, p. 16). By having a better understanding, banks can then adjust their asset to "adjust their short-term asset and liability structure"(Philipp et al. 2010, p. 16) to ensure they can fulfill the new capital requirement. More specifically, taking BNP Paribas as an example, it cuts dividend to increase retained earning to boost CET1 capital and sell impair Greek sovereign debt to reduce risk weighted asset (Yuting et al. 2012). From our point of view, banks are all computing different strategies regarding on their own company-specific risk. However, it is common for banks to cut dividends in order to meet the CET1 requirement (Yuting et al. 2012), which deteriorate shareholders’ interest. Potential Challenges: (1) Capital stress (2) Funding stress For simpler explanation, four banks from Europe are selected namely, BNP Paribas, Banco Santander, Deutsche Bank and Unicredit for comparison. The European Banking Authority (EBA) requires banks to reach a Common Equity Tier 1 ratio of 9% by the end of June 2012" (P.15HECparis). This period is shorter than the one set by Basel III. This imposes extra stress on banks to increase their liquidity within a short time. Furthermore, EBA has also decided a Stress Test in 2011 based on the RWAs, CET1 and buffer. Compared to other banks, Banco Santander in Spain would have the largest shortfall of

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