finance discussion board 2

finance discussion board 2 - Lindsey Aronoff Group 15...

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Lindsey Aronoff Group 15 Fin3403 Discussion Board Number 2 Part 1: “Two Cheers for the New Bank Capital Standards” Recently, the supervisors of central banks and bank agencies in twenty-seven countries have come together in agreement to pass Basel III which is an international agreement on capital requirements of banks. It is amazing that countries with such different viewpoints could make the same decision. This agreement was made to come up with a new minimum ratio. The minimum ratio is the capital to risk-weighted assets. These changes were made because we wanted Basel II to increase capital requirements as well, but they actually reduced capital requirements. A risk weighted problem with Basel II that led to passing Basel III was that Basel II had the biggest banks use their internal model to measure risk. This is a major problem since the biggest banks are usually the ones undergoing risk and someone else besides them should measure risk. Another problem with Basel II is that it took some assets off the balance sheet so they wouldn’t have to deal with capital requirements at all. Minimum liquidity requirements needed to be developed as well in the Basel III accords. Some positive changes to the Basel III include that Tier 1 capital must be at least 4% of risk weighted assets and also putting SIV’s back on the balance sheet to help determine the leverage ratio. The end result is that the Basel III was a tremendous success and all the changes should be adopted right away. http://online.wsj.com/article/SB30001424052748704523604575511813933977160.html “What You Need to Know About Basel III” This article describes Basel III also and how the bank community all felt relief pass through their bodies at the passage of these accords. Banks can work harder to increase their capital requirements with the time frame they are allotted in Basel III. All the new rules are less strict. As stated in the article, “Banks’ minimum total capital rises sharply, from 2 percent to 7 percent of risk-adjusted assets.” (http://www.observer.com/2010/commercial-observer/what- you-need-know-about-basel-iii) When businesses incur financial stress they are able to increase their capital even more to absorb all the losses that take place. The capital requirements under Basel III will not change due to the amount of risk lenders take, like in Basel II. These new capital requirements have already been met by the largest businesses in the United States. To limit the growth of credit, this new countercyclical buffer will range from 0 percent to 2.5 percent. These modifications took place because according to the article, “The Basal committee believes the changes support its goal of reducing the pro-cyclicality of credit by improving the quality and quantity of banks' capital cushions.” (http://www.observer.com/2010/commercial-observer/what-you-need-know-about-basel-iii) Each of these adaptations will occur in stages with the first beginning in 2013. Next, the common
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This note was uploaded on 04/19/2011 for the course FIN 4424 taught by Professor Collins during the Spring '11 term at Florida State College.

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finance discussion board 2 - Lindsey Aronoff Group 15...

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