Assessment of Capital and Leverage Regulation after the World Financial Crisis

Running head: RISK MANAGEMENT
Risk Management
Name of the Student
Name of the University
Author’s Note

1RISK MANAGEMENT
Table of Contents
Answer to 4(a)............................................................................................................................2
Answer to 4(b)............................................................................................................................3
References..................................................................................................................................5

2RISK MANAGEMENT
Answer to 4(a)
The following discussion shows the assessment of the introduced capital and leverage
regulation after the world financial crisis.
After the global financial crisis, the Basel Committee introduced a new regulatory
policy for strengthening the flexibility of banks along with the global banking system which
is known as Basel III. The inclusion of new capital adequacy regulation and certain liquidity
provisions can be seen in Basel III. While assessing the significance of Basel III, it needs to
mention that it has enhanced the capital quality that the banks need to hold to absorb the
potential losses in better manner. After that, Basel III requires higher level of capital as
compared to Basel II. Moreover, the introduction of LCR (Liquidity Coverage Ratio) and
NSFR (Net Stable Funding Ratio) In Basel III ensures that the banks possess the required
short-term liquidity in order to tackle the situation of higher leverage at the time of
expansion. It implies that Basel III prevents high leverage and procylicality (Fender and
Lewrick 2016).
Apart from Basel III, Ring-fence banking operations were introduced as a part of
capital and leverage regulation. The basic argument of this ring-fence banking operation is to
protect the assets of the depositors from the risky baking activities (unctad.org 2019). While
assessing this regulatory reform, it needs must mention that ring-fence banking operations
would result in limiting the probability of bank run when incurring losses from investment
decisions in casinos. This regulation puts restriction on the banks from engaging in
proprietary trading activities where there is the possibility of facing market risk. The
introduction of this regulation also puts restriction on the banks to involve in high-risk trading
activities (unctad.org 2019).