Credit Risk Management
Banks are an important part of the economy of any nation. Traditionally, the banks operate as financial intermediaries serving to satisfy the demand of people in need of various forms of financing. Through this, banks enable people to purchase home and businesses to expand. These financial institutions therefore facilitate investment and spending that are responsible for fueling the growth of the economy. In spite of their vital role in the economy, they are nevertheless prone to failure and just like other types of businesses, they also go bankrupt. Unfortunately, the failure of banks can have many and significant implications than any other type of business. As witnessed during the great depression, and in recent times following the global economic crisis and recession, the stability or lack of it in the banking system could trigger economic epidemics that would impact millions of people. With respect to this, it is important for banks to operate in sound and safe manner to avoid failing by any means. One of the means of achieving this is ensuring that government has put in place practical and strict regulations for the banks. On the other hand, with the presence of globalization, the activities of the banks are no longer restricted within the border of individual countries. As a result, there is an increasing need for international cooperation in the regulation of the banking system (Larson, 2011).
There appears to be some light at the end of the tunnel as the Basel Committee on Bank Supervision is ready to meet this need. As an international advisory authority on regulation of bank, the BCBS has launched guidance on matters crucial to ensuring the healthy operations of the banks across the globe. An example of such pressing issue is regulation of bank capital. The process of dealing with this issue has been on for the past 20 years and has led to the promulgation of capital adequacy standards that can be implemented by regulators of individual countries. Collectively, these standards are referred to as the Basel Accords. At times, these Accords have resulted in disagreements yet remain critical to the formulation of regulatory policy associated with bank capital. The BCBS has so far generated three such Accords, Basel III, which was published in 2010, is the most recent of them all. Each of these Accords purports to improve on the specifics of the previous one. However, there are indications that the last Accord is not without flaws and perhaps will not be last one (Larson, 2011).
The Banking Sector
Introduction
Instead of thinking about the stability of the bank and the Basel, focus should be concentrated on thinking about whether the Basel committee has addressed even the smallest details of the new Accord in the right manner. This is a task that could greatly impact the bottom lines of banks. It is therefore more prudent for the current purposes to focus on some more general and fundamental questions. For instance answers to questions such as, to what extent has the first Basel been successful in the accomplishment of the stated goals? How successful is the Basel II expected to be in achieving its goals? Are the stated goals desirable? Perhaps, the most basic yet important question of them all; is the Basel Accord, specifically, the international harmonization of bank capital standards, necessary or desirable to enjoy stability in the financial system? (Rodriguez, 2003)
History
After several years of deliberations following the Latin American sovereign defaults (of 1982), the BCBS, finally managed to complete the Basel capital Accord in 1988. It was established with two main objectives, to strengthen the stability and soundness of the international banking system as well as obtain a high level of consistency in its application to the banks across separate nations with an aim of reducing an existing source of unequal competition among international banks. To this end, the Basel Accord demands that the banks satisfy a predetermined minimum capital ratio mandatorily equivalent to at least eight percent of the total risk-weighted assets (Rodriguez, 2003).
The BCSB focus on capital standards for two major reasons; Firstly, since congress ordered the banking regulators to work with those regulators from other nations to ensure that banks had sufficient capital bases (Kapstein 1991; Oatley & Nabors 1998) and secondly because capital acts as a buffer for protecting bank deposits in case of losses on the side of assets (Rodriguez, 2003).
Financial Intermediaries
Are banks any special?
For the longest time, banks and other financial institutions have been exposed to greater government...
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