Does the Basel II Accord deser
Answer:
1. Basel II was blamed because banksand firms financial health was based on the fact that they wererated at a good rate by ratings agencies, which is what Basel IIgave inportance for, but these banks ultimately failed even whenthey were graded at investment levels as per the ratings agencies,this showed deficiency. To summarise, Basel II was formed to ensurecredibility in the banking system and as a fullproof mechanism toavoid bankruptcies, but there were several limitations whichultimately led to the fall in the banking system.
2. Basel III addressed theshortcomings which were prevalent in the banking system and theprevious accord, the need to raise the quality of capital held bybanks which will allow the bank to remain solvent. More strongliquidity requirements such as holding more liquid capital whichwill be easily convertible to cash. An improved level of riskcoverage so that risk weights are assigned wherein they areconsidered low risk assets during normal conditions and high riskduring economic stress, such as trading book, repos. Capitalconservation buffer ensured that there is no inappropriatedistribution of capital dividends. Introduction of leverage ratioand countercyclical capital charge so that the credit growth rateis measured against the GDP growth rate. Higher levels of stresstesting on regular basis. This will ensure timely intervention andproviding relief or bankrupty opportunities on timely manner.
3. Basel III addresses liquidityconcerns and focuses on global liquidity ratio standards so thatglobal banks don’t face headwinds and shocks. But the successdepends on whether it is implemented globally and its steps arefollowed by everyone, there will be country specific inputs whichmight dent the complete implementation of this accord as severalcountries don’t adhere to it fully. If this is done, then itreduces the chances of its effectiveness, however banks would beable to address liquidity concerns once all banks in the ecosystemfollow these procedures and central bank maintains efficacy, whichwill hopefully avert global financial crisis if not nationwide.