Basel III was designed to protect us from the types of chaos the economic world has experienced over the past couple of decades. But what is it? This article explores more.
What is Basel III?
Basel III is a global voluntary regulatory framework which is used to improve banking regulation, supervision and risk management within the banking sector, focusing on; capital adequacy, stress testing and market liquidity risk.
Some have argued that this framework essentially just extends Basel II, the preceding form in the series of Basil Accords, given claimed similarities between the two. However, that doesn’t change the fact that, if only on paper, Basel III marked a point of demarcation from the previous regulatory framework to what we have now.
Why Do We Need Basel III?
One of the ways in which Basel III seeks to prevent events like what we’ve experienced from the credit crunch of 2007/2008, and the years following, is that banks who are regulated under it are required to meet minimum capital requirements.
What this basically means, is that banks have a set amount of capital as a protective measure. A simplified metaphor for this is, if you think of the big banks you keep your money with as being a much larger version of my daughter’s piggy bank, then the minimum capital requirements would be how much she would need to keep in her piggy bank to ensure she could lend her brother money – of course she doesn’t charge interest when she lends to him (yet).
Another way that Basel III seeks to protect us, which extends from the aforementioned minimum capital requirements, is that it sets an expectation on banks to maintain proper leverage ratios, such as capital buffers. If this doesn’t make sense to you, think again of my daughter’s piggy bank and the money she lends her brother – if she doesn’t have enough money coming into her piggy bank, by not doing her chores, then she will not have enough to lend him money (when he gets nothing for not doing his chores).
Ensuring that minimum capital requirements are met and that banks are maintaining proper leverage ratios is done with certain aims in mind. One of these aims is to improve risk management – with every investment there is a risk, and like the safety equipment a mountain climber uses, Basel III seeks to work to prevent catastrophe. As well as this, Basel III seeks to improve the banking sector’s ability to manage financial stress. How a bank manages financial stress has a huge impact on the lives of its customers and Basel III seeks to ensure that, during periods of financial stress, consumers are impacted as little as possible.
The last aim of Basel III is to strengthen bank transparency. We all know – though sometimes struggle to live up to – honesty is the best policy. Banks are no different. When people, of any industry, make mistakes, there will always be individuals who will try to cover things up. Basel III’s aim to strengthen bank transparency is an attempt to ensure the honest operation of the banking industry, so when something goes wrong, it can be handled effectively.
Where next for Basel III?
One of the things that is worth bearing in mind about Basel III is that it is a continuous effort, not something that has happened, was done and has now stopped. Some individuals have argued that, with the changes made to Basel III in 2016 and 2017, we are now living within the Basel IV era of banking regulations. But this is, (again) if only on paper, not the case, as officially the regulation is still considered Basel III.
Whether Basel III works or not is a different matter. Some commentators have stated that Basel III is not enough and that stricter regulations are required, to protect consumers and businesses from another credit crunch. Equally, it has been argued that Basel III is too complex, suggesting that it needs to be stripped back and simplified. One of the important factors to remember with Basel III is that, in order for the benefits to materialise, it has to be implemented fully and consistently. This perhaps means that it may not be possible for the benefits of Basel III to materialise, given that the regulation is voluntary, undermining its ability to be implemented consistently across all banks.
Mayra Rodriguez Valladares, from Forbes, has recently stated that the Basel III rules have not hurt lending to small-medium enterprises. As well as this, a recent article on internationalbanker.com has stated that Basel III can work for emerging markets and developing economies.
It is an impossible question to answer – whether or not Basel III can save us from financial meltdown. Perhaps it can save us from the type of meltdown we experienced in 2008, which Basel II did not succeed in preventing. Perhaps the next collapse could mean a Great Depression, but can it prevent a meltdown unlike any we have experienced before or can predict?
Any investment contains a degree of risk. Stocks might plummet. Banks might go bust. Properties may get unexpected damages. There is simply no one best place to invest money and know you are safe in doing so.
We believe that bullion is a reasonably safe and secure way of investing your capital. Precious metals have proven historically to be timeless in their value, even despite potential scientific advancements.
Do you think that Basel III can save us from financial meltdown? If not, what is the alternative? And are there any safer forms of investment, than bullion? I know that my advice to my daughter is going to be to add to her silver stack, once her brother has paid off his debts.
Call a member of the Bleyer team now (01769 618618) to chat through your current investment choices, or email the team firstname.lastname@example.org. Or simply order online from our website at a time of your convenience, day or night.