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Basel III's ability to mitigate systemic risk

Author

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  • Stefan Schwerter
Abstract
Purpose - The financial crisis 2007‐2009 calls for a regulatory response. A crucial element of this task is the treatment of systemic risk. Basel III gains centre stage in this process. Thus, the purpose of this paper is to evaluate Basel III, examining its ability to reduce systemic risk. Design/methodology/approach - The paper highlights the importance of reducing systemic risk to achieve the goal of overall financial stability. By first focusing on the theoretical foundations of systemic risk, this paper explores and analyzes the crucial aspects of this almost impalpable risk type. It further investigates the current regulation of systemic risk, clearly showing Basel II's inability to reduce it. Then, it evaluates the Basel Committee's efforts to address these weaknesses through Basel III by investigating its incentives and its ability to reduce obvious drawbacks of Basel II as well as systemic risk factors. Findings - The findings show that there are still adjustments necessary. Although the development of Basel III is well advanced, providing some stabilizing incentives, there are still issues calling for closer consideration to counter all Basel II drawbacks and systemic risk factors adequately. These include: a risk‐weighted leverage ratio; a more thorough treatment of procyclicality; adjustments for the NSFR (Net Stable Funding ratio); and most importantly, the mandatory issue to internalize negative externalities from financial institutions, that is, the call for pricing systemic risk. Originality/value - The paper not only examines the new Basel III framework, as a response to the Financial Crisis 2007‐2009, but also draws attention to specific areas which the Basel Committee and regulators need to focus on more thoroughly.

Suggested Citation

  • Stefan Schwerter, 2011. "Basel III's ability to mitigate systemic risk," Journal of Financial Regulation and Compliance, Emerald Group Publishing Limited, vol. 19(4), pages 337-354, November.
    • Handle: RePEc:eme:jfrcpp:v:19:y:2011:i:4:p:337-354
    DOI: 10.1108/13581981111182947
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    References listed on IDEAS

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    1. Claudio Borio, 2011. "Implementing the Macroprudential Approach to Financial Regulation and Supervision," Chapters, in: Christopher J. Green & Eric J. Pentecost & Tom Weyman-Jones (ed.), The Financial Crisis and the Regulation of Finance, chapter 7, Edward Elgar Publishing.
    2. George Sheldon & Martin Maurer, 1998. "Interbank Lending and Systemic Risk: An Empirical Analysis for Switzerland," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 134(IV), pages 685-704, December.
    3. Persaud, Avinash, 2009. "Macro-Prudential Regulation," ECMI Papers 1712, Centre for European Policy Studies.
    4. Dow, James, 2000. "What Is Systemic Risk? Moral Hazard, Initial Shocks, and Propagation," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 18(2), pages 1-24, December.
    5. Christoph Zeitler & Bernd Rudolph & Christian Kirchner & Christoph Kaserer & Markus Ferber, 2010. "Regulierung und Aufsicht der Banken: Brauchen wir Basel III?," ifo Schnelldienst, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 63(03), pages 03-20, February.
    6. Charles A.E. Goodhart, 2009. "The Regulatory Response to the Financial Crisis," Books, Edward Elgar Publishing, number 13514.
    7. Lehar, Alfred, 2005. "Measuring systemic risk: A risk management approach," Journal of Banking & Finance, Elsevier, vol. 29(10), pages 2577-2603, October.
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    Cited by:

    1. Shazleena Mohamed Zainudin & Siti Zaleha Abdul Rasid & Rosmini Omar & Rohail Hassan, 2019. "The Good and Bad News about the New Liquidity Rules of Basel III in Islamic Banking of Malaysia," JRFM, MDPI, vol. 12(3), pages 1-15, July.
    2. Shailesh Rastogi & Arpita Sharma & Geetanjali Pinto & Venkata Mrudula Bhimavarapu, 2022. "A literature review of risk, regulation, and profitability of banks using a scientometric study," Future Business Journal, Springer, vol. 8(1), pages 1-17, December.
    3. Shailesh Rastogi & Rajani Gupte & R. Meenakshi, 2021. "A Holistic Perspective on Bank Performance Using Regulation, Profitability, and Risk-Taking with a View on Ownership Concentration," JRFM, MDPI, vol. 14(3), pages 1-22, March.
    4. Corbet, Shaen & Larkin, Charles, 2017. "Has the uniformity of banking regulation within the European Union restricted rather than encouraged sectoral development?," International Review of Financial Analysis, Elsevier, vol. 53(C), pages 48-65.
    5. Salehi , Mahdi & Zamani , Mohammad, 2014. "Market Risk Recognition by Different Models in Listed Banks of Tehran Stock Exchange and OTC," Journal of Money and Economy, Monetary and Banking Research Institute, Central Bank of the Islamic Republic of Iran, vol. 9(1), pages 147-176, October.
    6. Ashraf, Dawood & Rizwan, Muhammad Suhail & L’Huillier, Barbara, 2016. "A net stable funding ratio for Islamic banks and its impact on financial stability: An international investigation," Journal of Financial Stability, Elsevier, vol. 25(C), pages 47-57.
    7. Meng-Jou Lu & Cathy Yi-Hsuan Chen & Wolfgang Karl Härdle, 2017. "Copula-based factor model for credit risk analysis," Review of Quantitative Finance and Accounting, Springer, vol. 49(4), pages 949-971, November.
    8. Mohammed Kalloub & Ayhan Kapusuzoglu & Nildag Basak Ceylan, 2018. "The Impact Of Basel Iii Adoption By G20 Members On Their Credit Ratings," Eurasian Journal of Economics and Finance, Eurasian Publications, vol. 6(1), pages 47-55.
    9. Shahchera , Mahshid & Taheri , Mandana, 2017. "Liquidity Coverage Ratio, Ownership, Stability: Evidence from Iran," Journal of Money and Economy, Monetary and Banking Research Institute, Central Bank of the Islamic Republic of Iran, vol. 12(2), pages 175-191, April.
    10. repec:hum:wpaper:sfb649dp2015-042 is not listed on IDEAS
    11. Meng-Jou Lu & Cathy Yi-Hsuan Chen & Wolfgang Karl Hardle, 2020. "Copula-Based Factor Model for Credit Risk Analysis," Papers 2009.12092, arXiv.org, revised Oct 2020.

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