Question

Please write a 1-page summary of this page describing the old and new (i.e. the differences) in the Basal requirements and the effective (positive) and ineffective (negative) aspects that it has on banks. Thank you.

Answer 1

Differences between Basel 2 and basel 3 and its impact on banks.
Basel 3 was introduced in 2009 as a response to recession of 2008 which was caused due to excessive leverage provided by banks to the customer. Basel 3 is an enhanced version of basel 2 it is an effort to improve the banking sector capacity to deal with financial crisis and improve risk management and make banking system more transparent. Basic 3 was designed to improve the resilience of bank individually.
Capital requirement is tighter in basel 3 when compared to basel 2
Regulatory capital is divided into Tier 1 and Tier 2.
Tier 1 is further subdivided into equity Tier 1 and additional Tier 1. Basil tree has increased minimum common equity tier 1 capital from 4%to 4.5%. And minimum Tier 1 capital has been increased from 4% to 6%, while overall regulatory capital was left and changed to 8%. The guidelines for Risk weighted assets of basel 2 and Basel 3 is same.

Capital conversion buffer: it has been introduced so as to provide a buffer that can be utilised to withstand losses and financial economic crisis. It is kept at 2.5 % of risk weighted assets.

Counter cyclical measures
This has been introduced in order to protect large banks against physical changes on their balance sheet. Banks have to set aside additional capital when there is credit expansion while capital requirements are loosened in case of credit contraction.

Leverage and liquidity measure
Leverage and liquidity requirement were introduced in order to protect Bank against expressive borrowings and ensures that banks have sufficient liquidity during financial crisis.
Leverage ratio was kept that 3% which is calculated as Tier 1 capital divided by total of balance assets less tangible assets