Basel III – A double-edged sword

Ever wonder why some industries do not regulate that heavily yet it seems to operate just fine (their failure has minimal impact to the society) but banks which are supposed to be highly regulated, ran by elites but extremely vulnerable to the economic crisis? The banks help people to gamble with “future” money, multiplying leverage every day and help people to “achieve” their dreams and goals. During these processes, the banks will encounter issues such as adverse selection and black swans event that would jeopardize their firm as we have seen in 2008 financial crisis.

Lehman Brothers was rated as investment grades by the rating agencies (implying their risk of default is extremely low), and the subprime mortgage crisis has seen US$ 7.3bil evaporated into thin air when the bubble burst. The objective of this research is not to discuss the 2008 financial crisis (though it is one of the topics that we will be covering in near-term). We will explore the Basel III and its impact on the banking system after the implementation. Basel Committee developed Basel III in response to the 2008 financial crisis. We are currently in the “third” version which implies that the previous 2 version failed, and it probably failed quite severely that forced the Basel Committee to rethink risk management and develop Basel III.

We also did a preliminary assessment on six Malaysia banks to see whether they would comply with the capital ratio if Basel III were to be fully implemented today. We found that three out of six banks would potentially fail the tests. Click here for the research report.

 

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