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.

According to Barth, Prabha, and Wihlborg (2014), the capital adequacy regulation can result in rapid increase of compliance costs. What’s more, Volcker Rule prohibits proprietary trading, which can damage bank’s hedging capability and threaten bank’s profitability. Those extra regulatory burdens caused by the Act makes it less desirable to be too large.

First, high capital requirements could enable institutions to be more flexible facing financial stress and crises. Second, the CFPB strengthens the oversight responsibilities, lessens the regulatory infrastructure risky gaps, and improves the protection for consumers. Third, the Federal Deposit Insurance Corporation’s (FDIC) single-point-of-entry strategy installs standard procedures to wind down failed financial institutions,

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

The banking sector has sound fundamentals. Banks are highly capitalized. As of July 2017, the BCRA reports that banks have a capital compliance rate (qualified capital/ risk-weighted assets) of 14.7%. This exceeds the requirements by 79%. Banks have been significantly over the capital requirements for the previous five years. Liquidity indicators are strong. The broad liquidity ratio in July was 45.4%, while the liquidity ratio excluding BCRA securities stood at 29.6%

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

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.

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.

There is a vast amount of literature available on the additional procyclicality of regulatory capital charges in Pillar 1 of Basel II. In this section, we shall briefly visit this literature and see if any conclusions can be drawn from this, before proceeding to the conclusion and mitigation of these procyclical effects. The majority of the literature, as expected, focuses primarily on the IRB approach, as this aspect of Basel II has drawn the most criticism from financial practitioners and academics alike. The greater part of this literature has found that there is an overwhelmingly substantial rise in procyclicality of minimum regulatory capital charges originating

The phased introduction of new banks in the private sector and expansion in the number of foreign banks provided for a new level of competition. Furthermore, increasingly tight capital adequacy norms, prudential and supervision norms were to apply equally across all banks, regardless of their ownership. [34]

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).

The higher capital requirements would imply that banks need to use more capital funding and place larger constraints on banks’ sources and usage of funding (The banking system 2013). This would limit or forego banks opportunity to finance new projects (FSI 2013).

To add to the woos further poor valuations of the public sector bank stocks, are not helping matters either, and raising fresh equity has become difficult altogether. The public sector banks have been reluctant to tap the markets for increasing their capital levels. Hence the underperforming banks are now faced with the even a greater levels of challenge and are now constantly looking at newer ways of meeting their capital needs. Some of these poorly managed banks could any day slide below the minimum regulatory threshold of capital if they don't organize their finances together. A very recent example would be the united bank of India where the CAR dropped to a level of 9%. To avoid this situation the immediate need of the hour for all banks, and more specifically the public sector banks, is that capital must be conserved and utilized as efficiently as possible. 

In addition, different countries use different accounting systems in calculating total assets which can produce divergent and more importantly incomparable figures, making measuring systemic importance solely by “size” more problematic (Barth et al., 2013). Policymakers and scholars have hence started to realise the difference between the size and the systemic importance of a financial institution (Zhou, 2010). For example, after Group of Twenty (G-20) quickly established the Financial Stability Board (FSB) at the 2009 London Summit for the purpose of developing and implementing reform agenda to ensure the stability of the financial system, FSB was assigned by G-20 during 2010 Seoul summit to identify global systemically important financial institutions (G-SIFIs) which pose systemic risk to both national and international financial systems (Barth et al., 2013). A year before that, FSB has recognised three important indicators of systemic importance, namely the size, interconnectedness and substitutability of a financial institution (Bongini & Nieri, 2014). In July 2011, the Basel Committee on Bank Supervision (BCBS) (2013) publicised a document which provides a detailed methodology for assessing systemic importance of G-SIBs (globally systemically important banks) , further including the measures of complexity and cross-jurisdictional activity on top of the three submitted by FSB. This methodology therefore identifies five equally-weighted (20%)

The single rulebook is based on pillars- the rules are most important for the banking union - are: