StudentShare
Contact Us
Sign In / Sign Up for FREE
Search
Go to advanced search...
Free

Finance - BIS Capital Adequacy - Essay Example

Cite this document
Summary
The BIS or Bank for International Settlements is the “mother of all central banks” that maintains one office located in Basel, Switzerland with only two representative offices (Hong Kong and Mexico City). Despite this seeming low-key profile, the BIS plays a very big role in…
Download full paper File format: .doc, available for editing
GRAB THE BEST PAPER98.4% of users find it useful
Finance - BIS Capital Adequacy
Read Text Preview

Extract of sample "Finance - BIS Capital Adequacy"

BIS Capital Adequacy 29 July 2009 Bank for International Settlements The BIS or Bank for International Settlements is the “mother of all central banks” that maintains one office located in Basel, Switzerland with only two representative offices (Hong Kong and Mexico City). Despite this seeming low-key profile, the BIS plays a very big role in maintaining global monetary and financial stability. It renders services exclusively to central bank authorities and international organizations only by providing a forum for discussions and doing both economics and monetary research.

Additionally, and more importantly, it serves as the prime counter-party among central banks transactions and as trustee or escrow agent for major international financial operations. Among its more important committees is the Basel Committee which is responsible for the promulgation of banking regulation guidelines concerning supervisory issues. In this regard, Basel I (1988 Accord) was a landmark in the banking industry in that banks having an international presence are required to hold as a minimum 8% of their capital equal to the risk weighted assets (there are five risk weightings).

Basel II, which came in June 2004, addressed some of the weaknesses from Basel I. Both accords, however, are designed to strengthen the financial banking system by requiring a more rigorous set of capital requirements for banks to meet their credit and capital risks. Furthermore, Basel II is more forward-looking by requiring banks to identify those risks now and in the future especially with the sudden surge in hedge funds and esoteric investment instruments such as credit default swaps and other derivatives.

Basel II attempts to avoid systemic risks such as what happened in the US subprime mortgage crisis which engulfed the entire banking system with spectacular collapses such as AIG. Basel II is also more comprehensive by requiring banks to maintain enough capital to certain risks by quantifying credit and operational risks. A bank that engages in more risky investments is required to maintain a higher capital adequacy ratio to remain solvent in case of a crisis. Other considerations are a banks residual risks and the mandatory disclosures to comply with international accounting rules and standards.

This last provision is crucial as it gives counter-parties an idea of the risks they face when dealing with a certain international bank. This way, there are no ticking time bombs like CDS which Mr. Warren Buffett likens to weapons of mass destruction (Graham & Dodd 2008, p. 622) due to unregulated credit default swaps that reached an astounding $45,000 billion! (Soros 2008). An increasing sophistication and complexity of financial markets requires close regulation to determine the capacity of a counter-party to honor its obligations and Basel II thankfully requires this.

Before the housing crisis turned into a financial crisis, banks were of the view that more is always better. It can be said that banks may fail based on three reasons: poor lending practices, fraud and mismanagement. The lending frenzy prior to the mortgage crisis showed banks abandoned good credit practices and were guilty of the aforementioned reasons. Bank management wanted fast growth to capture a bigger slice of the supposedly growing housing industry pie and caution was thrown entirely out of the window.

They indiscriminately lent to unqualified borrowers and not overly concerned with risks because they employed agents that originated the loans and then repackaged these loans in the derivatives markets through asset backed securities (ABS) which were given investment grade ratings. End result was a major distortion in the risk-reward equation. The Basel accords forced banks to take a conservative approach by diverting capital to improve solvency instead of funding new unbridled growth. A net effect was slow down growth to sustainable levels appropriate to a banks capitalization.

But techniques like SGR cannot substitute for good strategic thinking (Higgins 1984, p. 2). ReferencesGraham, B & Dodd, D 2008, Security Analysis (6th edition, illustrated), McGraw-Hill Professional, Dubuque, Iowa.Higgins, RC 1984, Analysis for Financial Management, R.D. Irwin, Homewood, IL.Soros, G (April 03, 2008), The False Belief at the Heart of the Financial Turmoil, The Financial Times Ltd., London, United Kingdom. Available from: www.FT.com http://www.ft.com/cms/s/0/ca1fac78-0116-11dd-a0c5-000077b07658.html?nclick_check=1 (Accessed on 24 July 2009) or alternatively athttp://www.opednews.com/maxwrite/linkframe.php?linkid=56186

Read More
Cite this document
  • APA
  • MLA
  • CHICAGO
(“Finance - BIS Capital Adequacy Essay Example | Topics and Well Written Essays - 500 words”, n.d.)
Finance - BIS Capital Adequacy Essay Example | Topics and Well Written Essays - 500 words. Retrieved from https://studentshare.org/miscellaneous/1556509-finance-bis-capital-adequacy
(Finance - BIS Capital Adequacy Essay Example | Topics and Well Written Essays - 500 Words)
Finance - BIS Capital Adequacy Essay Example | Topics and Well Written Essays - 500 Words. https://studentshare.org/miscellaneous/1556509-finance-bis-capital-adequacy.
“Finance - BIS Capital Adequacy Essay Example | Topics and Well Written Essays - 500 Words”, n.d. https://studentshare.org/miscellaneous/1556509-finance-bis-capital-adequacy.
  • Cited: 0 times

CHECK THESE SAMPLES OF Finance - BIS Capital Adequacy

Financial Markets and Risk: Adequate Liquidity

capital adequacy The availability of capital as well as its costs is essential in determining the soundness and safety of commercial banks (Greuning & Bratanovic, 2009).... capital adequacy standard is stipulated by Basel I and Basel II capital accords whereby commercial banks are supposed to ensure adequate amount of capital and reserves is maintained in order to guard the bank against solvency.... Banks with a strong capital base can be able to effectively absorb risks associated with assets and ensure safety of depositors funds as well as maintain creditor confidence hence if a bank has a high amount of Tier 1 capital, it has a higher liquidity....
9 Pages (2250 words) Assignment

Finance for Managers

3 Unfavorable Net working capital Turnover 10.... finance for Managers Name: Faisal al Hajri Student number: 1068926 Tutor: Mrs.... Kay Smith  Word count: 4018 Question 1:- Analysis of The Present Position of Jools Furniture Ltd.... The table below presents the calculations from the information provided in the case study about furniture business....
15 Pages (3750 words) Essay

Finance and Growth Strategies

Future Expansion Plans and capital Requirements: If the company has expansion plans, diversification plans etc.... The requirement could be in the form of capital for setting up a new production facility or liquid funds to launch a marketing blitz for a new range of products or tapping a new market....
11 Pages (2750 words) Essay

Capital Markets Effects on the New Economy Bubble

As cited by Carmen and Rogoff (2010), the ‘new economy' bubble and the banking crisis are regarded as facets of the global financial crisis. capital markets laid the This is attributed to the fact that when a firm or a nation borrows money from the capital markets, the reason is often to invest in additional physical capital products that will be utilized to increase income.... capital markets are usually concerned with long tern finance....
9 Pages (2250 words) Essay

Risk Management and International Finance

In addition, the approach and formulae to be applied will be vital in assessing the extent through which new accords may be applied to towards achieving increased credit risk sensitivity within a minimal capital charge (Ganguin and Bilardello, 2005; Pg.... Finally, the study will be vital in comparing the current capital requirement of banks under the proposed Basel system thereby comparing the underlying provision with the suitability or applicability of the same to the Marylebone Bank....
10 Pages (2500 words) Assignment

Small and Medium Business Enterprises

Another case was in Mexico whereby the Mexican Development Fund was established so as to provide an arrangement of finance to aid agricultural activities.... They include Micro-finance, venture capitalist trust, and small loan centers among others.... They are significant to the US economy and represent about 96% of all the employment firms....
12 Pages (3000 words) Essay

Finance and Growth Strategies

In this paper, the author describes concurrent decisions to mitigate risk and maintain capital adequacy and also methods too such as financial regulatory mechanisms, responsibility in the decision-making structure and the chain of command and legitimacy.... Next, there is the Jensen's Alpha, a measure that calculates the excess returns above the security market line as done in the capital asset pricing model (CAPM)....
13 Pages (3250 words) Term Paper

Project Management and Big Project Financing

Project financing management, which include estimating costs, both initial capital and maintenance costs; ‘planning for and anticipating the unforeseen'; and other financial matters, constitutes an extremely important part of project management process, especially in the case of large-scale projects where ‘waste, excessive cost and delays can result from poor coordination and communication among specialists' (Hendrickson, 2003).... Importance has also been placed upon the complexity of project finance management which remains a very crucial and pivotal part of any project management process....
9 Pages (2250 words) Essay
sponsored ads
We use cookies to create the best experience for you. Keep on browsing if you are OK with that, or find out how to manage cookies.
Contact Us