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Symposium 2015

Virtual Library File - A Viable Alternative to Basel III Prudential Capital Rules

The Challenge

In the aftermath of the global financial crisis, most countries have seen a wave of new regulatory initiatives aimed at increasing financial stability and resilience. However, the implementation of re ...

In the aftermath of the global financial crisis, most countries have seen a wave of new regulatory initiatives aimed at increasing financial stability and resilience. However, the implementation of reforms is still in progress, and financial systems worldwide are far from being immune to another financial crisis.

The implementation of Basel III, for instance, leads to a gradual increase in capital requirements for banks, though many economists still consider these requirements as too low. Another envisioned goal, the partial separation of "traditional" and "hedge" banking, has not yet been achieved. We are also far away from a global harmonization of standards, best practices, and supervision. Moreover, there might even be the temptation to misjudge the partial implementation of regulatory reforms as finished. In fact, we might need more fundamental changes in the structure of the financial sector to prevent a future financial crisis.

Stefano Micossi argues in this paper that the Basel framework for bank prudential requirements is deeply flawed and that the Basel III revision has failed to correct these flaws, making the system even more complicated, opaque and open to manipulation. In practice, he finds that the present system does not offer a reliable capital standard for banks to regulators and financial markets and its divergent implementation in the main jurisdictions of the European Union and the United States has broken the market into special fiefdoms governed by national regulators in response to untoward special interests.