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Chapter from: "Basel III Liquidity Regulation and Its Implications"
Published by: Business Expert Press
Published in: 2014

Abstract

This chapter is excerpted from ‘Basel III Liquidity Regulation and Its Implications'. Liquidity involves the degree to which an asset can be bought or sold in the market without affecting its price. The 2007 to 2009 financial crisis was characterized by a decrease in liquidity and necessitated the introduction of Basel III capital and liquidity regulation in 2010. In this book, we apply such regulation on a broad cross-section of countries in order to understand and demonstrate the implications of Basel III. This book summarizes the defining features of the Basel I, II, and III Accords and their perceived shortcomings as well as the role of the Basel Committee on Banking Supervision (BCBS) in promulgating international banking regulation. In addition, we compare the accords in terms of their ability to determine the capital adequacy of banks and assign risk-weights to assets. Basel III quantifies liquidity risk by using the measures liquidity coverage ratio (LCR) and net stable funding ratio (NSFR). Our book considers approximation techniques that may be applied to estimate these liquidity measures. Except for those on NSFR, our results support the rationale behind the drafting of Basel III liquidity regulation. This points to the fact that LCR regulation is far more comprehensive than that for the NSFR. We also establish that liquidity risk from the market was a more reliable predictor of bank failures than intrinsic banking liquidity risk. Liquidity creation refers to the ability of banks to extend loans, while allowing depositors to withdraw funds on demand. The book demonstrates how to analyze the connections between liquidity creation and bank capital. We also investigate which risks liquidity creation generates for banks. In this case, we consider how Basel III regulation may be employed to manage such risks via capital and liquidity requirements. In addition, we differentiate between large, medium, and small banks to demonstrate how the effect of capital and liquidity creation differs by bank size. The book emphasizes that the implementation of Basel III bank liquidity regulation will affect the macroeconomy of countries via intermediation costs. In particular, we quantify adjustment costs for South African macroeconomy variables such as GDP, investment, inflation, consumption, personal income, personal savings, and employment. We find that these costs depend on the implementation period, with longer periods leading to reduced output losses. Furthermore, by comparison to the Macroeconomic Assessment Group (MAG) countries, the costs incurred are of similar size but marginally higher.

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Abstract

This chapter is excerpted from ‘Basel III Liquidity Regulation and Its Implications'. Liquidity involves the degree to which an asset can be bought or sold in the market without affecting its price. The 2007 to 2009 financial crisis was characterized by a decrease in liquidity and necessitated the introduction of Basel III capital and liquidity regulation in 2010. In this book, we apply such regulation on a broad cross-section of countries in order to understand and demonstrate the implications of Basel III. This book summarizes the defining features of the Basel I, II, and III Accords and their perceived shortcomings as well as the role of the Basel Committee on Banking Supervision (BCBS) in promulgating international banking regulation. In addition, we compare the accords in terms of their ability to determine the capital adequacy of banks and assign risk-weights to assets. Basel III quantifies liquidity risk by using the measures liquidity coverage ratio (LCR) and net stable funding ratio (NSFR). Our book considers approximation techniques that may be applied to estimate these liquidity measures. Except for those on NSFR, our results support the rationale behind the drafting of Basel III liquidity regulation. This points to the fact that LCR regulation is far more comprehensive than that for the NSFR. We also establish that liquidity risk from the market was a more reliable predictor of bank failures than intrinsic banking liquidity risk. Liquidity creation refers to the ability of banks to extend loans, while allowing depositors to withdraw funds on demand. The book demonstrates how to analyze the connections between liquidity creation and bank capital. We also investigate which risks liquidity creation generates for banks. In this case, we consider how Basel III regulation may be employed to manage such risks via capital and liquidity requirements. In addition, we differentiate between large, medium, and small banks to demonstrate how the effect of capital and liquidity creation differs by bank size. The book emphasizes that the implementation of Basel III bank liquidity regulation will affect the macroeconomy of countries via intermediation costs. In particular, we quantify adjustment costs for South African macroeconomy variables such as GDP, investment, inflation, consumption, personal income, personal savings, and employment. We find that these costs depend on the implementation period, with longer periods leading to reduced output losses. Furthermore, by comparison to the Macroeconomic Assessment Group (MAG) countries, the costs incurred are of similar size but marginally higher.

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