The Impact of Basel III and its Implication for International Project Financing Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

Introduction

The paper pertains to the understanding of the Basel Accord and its importance in the banking sectors. The paper also attempts to shed light on the Basel II Accord and its role in the 2008 financial crisis. Moreover, the paper elaborates the revision of Basel II regulation into a Basel II Accord and its impact in the banking sectors. Furthermore, the paper provides the implications of Basel III for the international project financing. Lastly, the paper provides a brief summary of the entire paper.

Basel Accord

Basel Accord refers to the set of regulations designed for the banking sectors involving their risks so that these sectors can refrain itself from unexpected losses. It is also considered as the set of recommendations that regulates the capital available for financial institutions so they could meet the obligations that have been highlighted by Bankng of International Settlement (BIS). The aim of the Basel Accord is to ensure the stability of banks while highlighting the minimum capital requirements for these sectors. However, due to the financial crisis in 2008 it doubted the regulations of Basel Accord and due to which it called for the changes in regulations to provide a better banking system (Madura 2006).

The Basel Committee

The Basel Committee is formed amongst the representatives of the Central Bank, G-20 economies regulatory authorities, and financial institutions. The committee is required to meet 4 times each year, but is also depends on the Chairman of the committee to call additional meetings. Each member of the Basel Committee on Banking Supervision (BCBS) appoints one representative to attend BCBS meetings. All the decisions at BCBS are taken on the basis of consensus and can be revealed either by press statements or through the committee’s website (Bank for International Settlement 2013).

Activities of Basel Committee

The exchange of information from different sectors to identify the potential risks and emerging risks that may stir the global financial crisis in the banking sectors. Cross-border coordination is also a key activity for the Basel Committee to share a common understanding and approach towards the risks of financial crisis and its mitigation tools. It addresses the global regulations, share guidelines and sound practices in financial institutions. The input and feedback from other banking authorities and the Central bank is also gathered by the Basel Committee on its policy (Bank for International Settlement 2013).

Basel II and the Financial Crisis

Basel II is amongst the second Basel Accord, which provides regulation for the banking laws issued by the Basel Committee and implemented in the year 2004. The major regulation of the Basel II focused upon international standards for banking regulations to maintain a minimum requirement of capital to avoid financial and operating risks. Consistency of regulations had remained the main focus to avoid any inequality amongst active banks operating internationally. This strategy was devised to ensure the avoidance of financial collapse and it foster the protection of international financial institutions. The Basel II regulations were designed in a way that the two factors, including risk and the capital requirements complement each other. It ensures that the bank must have an adequate capital for the risks it is exposed towards achieving its goals for investment practices. If a bank is exposed by a greater risk, then the regulation proposes the bank to have higher capital requirements. Three pillars have been described in the Basel II to manage banking regulations. The first pillar focuses on minimum capital requirements, the second pillar elaborates the supervisory review, while the third pillar focuses on market discipline. The purpose is to safeguard the solvency of the bank and to prevent an economic downturn (Engelmann and Rauhmeier 2011).

The Finanical Crisis

The implications of Basel II have largely contributed towards the financial crisis that occurred in the year 2008. The regulations that were being forced by the Basel II Accord had complications which led to the inadequate control of the risks due to regulatory failures in different countries, and the response from the Basel Committee against continuous financial innovation. Amongst the top reason for the failure of Basel II Accord includes the average level of capital required for banking sectors. The inadequate capital requirements for banks through the new discipline provided by Basel II Accord triggered the collapse of many banks because their capital was not in accordance with their risks. The nature of capital requirements highlighted by the Basel II accord were cyclic due to which it allowed the fluctuations to occur in the business cycle of the banking sectors (Engelmann and Rauhmeier 2011).

A possible conflict of interest also promoted a discrepancy in regulations due to which financial institutions failed to receive a proper assessment of their risks. A conflict between non-banking institutions and the banking institutions occurred when the regulation of Basel II Accord delegated the credit risk assessment of banking institutions.......................

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