The And Soundness And Stability Of The International Banking System

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.

Intervention by the central bank is warranted to avoid welfare loss for the institution’s stakeholders since it may be that due to access to supervisory information, the authorities are in a better position to evaluate the financial position of a bank rather than the inter-bank market. The other situation in which the central bank may be the LOLR is when the stability of the entire financial system may be threatened following the failure of a solvent bank. This widespread financial instability may put to risk the ability of the financial system to carry out its primary functions.

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:

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 American Banking system has always focused on order, resiliency and the ability to withstand the storm. When comparing banking systems, it is required analyze both the strengths and the weaknesses of each system. While examining the American banking system, a key strength that is presented is the pride if its resiliency, “these improvements in the resiliency of the banking system have been reinforced by a series of key capital and liquidity rules that have been enacted in the United States, including the Basel III capital and liquidity frameworks as adopted in more stringent form” (The State of American Banking).

This chapter is about the background of 2007-2008 financial crisis. The 2007-2008 financial crisis has a huge impact on US banking system and how the banks operate and how they are regulated after the financial turmoil. This financial crisis started with difficulty of rolling over asset backed commercial papers in the summer of 2007 due to uncertainty on the liquidity of mortgage backed securities and questions about the soundness of banks and non-bank financial institutes when interest rate continued to go up at a faster pace since 2004. In March 2008 the second wave of liquidity loss occurred after US government decided to bailout Bear Stearns and some commercial banks, then other financial institutions took it as a warning of financial difficulty of their peers. In the meantime banks started hoarding cash and reserve instead of lending out to fellow banks and corporations. The third wave of credit crunch which eventually brought down US financial system and spread over the globe was Lehman Brother’s bankruptcy in August 2008. Many major commercial banks in US held structured products and commercial papers of Lehman Brother, as a result, they suffered a great loss as Lehman Brother went into insolvency. This panic of bank insolvency caused loss of liquidity in both commercial paper market and inter-bank market. Still banks were reluctant to turn to US government or Federal Reserve as this kind of action might indicate delicacy of

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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

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 crises showed just how interconnected the banking system is throughout the world. The Lehman Brothers bank closure in 2008 created a major financial crisis around the world due to its influence (The Economist, 2013). It took the government’s massive bail outs to prevent total collapse of the financial system and to some extent economic collapse of the country. This government action set a precedent and to some sent a message that the reckless action by the banks in the name of profit is fine because they now have a safety net. It is a good example of how the collapse of a big financial institution that has national and global influence can affect several interrelated firms to the detriment of the country’s economic interests. This paper therefore, examines the notion “too big to fail” in relation to banking.

Most traditional upbringings include a few key life lessons. Among these is a sense of paying it forward. There are many different proverbs to describe this occurrence; “Do unto to others as you would have them do unto you,” and “One good turn deserves another,” The idea of reciprocity is such a generalized norm that people often don’t realize that they partake in this behavior. These reciprocal behaviors can often be very simple; holding a door, offering favors, and sharing some of your time can help to establish equity in relationships. People keep track of the good things done for them so that they can pay back these good deeds. Being indebted to anyone is a situation most people are uncomfortable with.

regulation of financial markets and bank liquidity. In the next few years, national and international

Further, Acharya et al. (2014) develop a model, which sees banks overleveraged because they invest too much in low risk-weighted instead of diversifying the risk. Korte and Steffen build on this model to develop their hypothesis for the research paper.

Economists throughout the world have agreed that there is a need of regulation of the financial system in its entirety. This is because, as the financial crisis from 2008 has shown, the micro orientated regulation measures do not suffice. They neglect the build-up of systemic risk and the interconnections within the financial system, which have shown to lead to the amplification of the effects of shocks. Therefore, as a complement to the microprudential framework, a new type of regulation tools is being developed- macroprudential. It aims to prevent the accumulation of systemic risk and improve the stability of the financial system.

Banking crisis has been much more frequent than any of the expectations by research or any of the banks. The annual probability of a crisis has been judged to be around 4-5% in both the industrial sector and emerging market countries (Walter, 2010). The banking sector has been effected by many factors which contributes to its vulnerability. Some of the factors that adds to the vulnerability of the bank are minimum availability of high-quality capital, lack of high quality liquid assets, and sources for reliable funding.