Bank Capital Adequacy: Problems with Basel III Accord & Resolutions

This report examines the importance of capital for financial institutions, particularly banks, in the context of evolving economic scenarios. It discusses the role of capital in banks' risk management, analyzing problems associated with Basel III Accord's bank capital adequacy requirements. The study identifies critical issues in maintaining capital adequacy, especially for EMDEs, and proposes future recommendations for enhancing financial stability. The report covers the background of bank capital adequacy, its role in risk management, challenges posed by Basel III, and suggests resolutions such as changes in legal frameworks and the implementation of new economic policies to mitigate risks in the international banking sector.

Capital is important to
financial institutions especially
for banks

Executive summary
Capital development is important for financial institutions advancement within recnt
working scenarios, where banks are taking best steps for further strengthening monetary
strategies efficacy diversely. Recent capital has developed effective analysis on role played by
banks in effective risk management, aspects towards determining based Basel Accord, within
context of bank capital adequacy requirements. Study has also concluded analysis based on
various problems, and new future recommendations for developing significant rise towards
effective financial stability

Table of Contents
INTRODUCTION...........................................................................................................................3
MAIN BODY..................................................................................................................................3
Background of bank capital adequacy.........................................................................................3
Role played by capital in banks’ risk management.....................................................................3
Problems associated with Basel III Accord in the context of bank capital adequacy
requirement..................................................................................................................................4
Suggestions on future resolutions to the problem identified.......................................................5
CONCLUSION................................................................................................................................5
REFERENCES................................................................................................................................1

INTRODUCTION
Capital management is important to financial institutions especially for
banks, as within recent time there has been varied changes coming among
economies working scenarios. In the past decade bank capital is widely used
to manage banks market risk credit, where report will discuss about the role
played by capital in banks risk management. Also, problems associated with
bank capita; adequacy requirements in Basel III Accord will be analysed for
strengthening focus towards new changes. Study will determine capital adequacy analysis,
identification of main critical problems within capital adequacy maintenance for extended
developed scenarios. Furthermore, capital adequacy and identification of problems will be
analysed, and new recommendations which can bring on improved changes within structure in
economies financial structure.
MAIN BODY
Background of bank capital adequacy
Capital adequacy ratio is one of the important aspect with respect to bank because it
measures the proportion of bank capital against the risk. It is highly important that the bank must
hold an adequate proportion of capital so that it can meet the risk which may arise in the future.
Capital adequacy is tracked by the concerned authority which shows that whether the bank has
adequate adequacy in terms of meeting the loss and the risk (Irawati and et.al., 2019). With the
aspect of capital adequacy norm, a sufficient amount of capital need to be kept aside by the bank
so that the emerged risk can be mitigated and meted. As per Basel III the minimum capital
adequacy ratio that the bank need to maintain is 8%. It is measured as bank’s capital in relation
with the risk weighted assets. It enables better financial resilience to the banks along with
ensuring strong capitalization structure and financial base. Bank capital adequacy further
enhances proper consistency to be maintained, based on specific working efficacy and
maintenance of larger effective results (Vernimmen, Quiry and Le Fur, 2017).
The bank capital adequacy ratio is also essential, as it ensures efficiency and stability of
nations new financial system goals by lowering risk of banks becoming insolvent. Bank with
high capital adequacy is considered safe and further effective in meeting financial obligations

effectively, where also capital adequacy maintenance signifies wider scale competent
engagement. Maintaining capital adequacy ratio is measure with how much capital bank has
available, and percentage of bank risk weighted credit exposures. Purpose is to establish banks
where enough capital on reserve is to handle certain amount of losses, before being at risk for
becoming insolvent. Capital adequacy ratio is important for view of solvency within banks and
protection, from events which arises result of liquidity risk as well as the credit risk where banks
are exposed to normal course of businesses. This has been also analysed that further extended
development in maintaining proper advancement in risk management, signifies rise on developed
working expertise. Also longer extended vision has been found to be critical for improved
working vision, in maintaining risk management goals practically on technical vision for diverse
range paradigms towards longer extended improved domains.
Role played by capital in banks’ risk management
As per the views of Leo, Sharma and Maddulety, (2019) the capital incorporation in the
bank plays an important role in terms of protecting the bank from the unsecured and uninsured
risk which may have chances to get converted into losses. This means it can be said that, with the
presence of adequate capital in the bank, meeting of loss and protection from unsecured risk can
be ensured. With the presence of capital in the structure of the bank, the loss can be absorbed by
it and at the same time it will also lead to assist the bank in building up of confidence. With the
presence of adequate capital, the bank can cover any losses in terms of replacing the amount of
loss with the capital proportion which it holds. Capital is counted as bank’s asset which has no
contractual commitment of making a repayment (Brastama and Yadnya, 2020). This means with
the presence of capital the bank can meet its liabilities and due i.e. the financial losses.
On the other hand, Tursoy, (2018) said that, as with the holding of asset the risk proportion
in the bank would raise which means instead of holding more capital, the banks need to make
focus towards the reduction of holding of those assets which are counted as risky and need a high
proportion of capital. This means with aspect of holding low proportion of risk assets, the bank
can reduce the proportion of holding high amount of capital along with ensuring smooth running
operations and mitigation of risk.
Van Greuning and Bratanovic, (2020) states that, the occurrence of risk is highly common.
Likewise, along with the persistence of uncertain perspective of risk, make it more important that
the bank may hold a sufficient proportion of capital so that the concerned risk can be mitigated.

As the structure of the bank is maintained in such a manner that its liabilities are fully covered
with its assets which means it need not to move towards the use of capital. In case if it need to
use capital then it uses its share capital. Also, as bank already maintain a good proportion of
margin which help it to protect from the facing of risk but in case of occurrence of uncertainties
the bank can use the proportion of capital in respect to risk.
Problems associated with Basel III Accord in the context of bank capital adequacy requirement
Basel III Accord is an international set of measures which is developed by Basel
Committee on Banking Supervision in respect to the financial crises of 2007-09. The main aim
of these measures is to strengthen the supervision, regulation and management of risk of the
bank. As per Basel III Accord there is a minimum requirement which are applicable to
international active bank that include the guidance related with leverage ratio, capital adequacy
norms and various others (Basel III: international regulatory framework for banks, 2022). Basel
introduced new requirements with respect to regulatory capital aspects with large banks, in
enduring cyclical changes on balance sheets, Also, period of credit expansion, banks must set
aside specific additional capital aspects for strengthening capital requirements and during times
of credit contraction specifically.
Basel III is designed with a voluntary application towards the bank and is created with the
input and feedbacks from financial institution and banks. But majority of nation make it apply
towards their domestic regulatory statues of banking system which make it to have its
compulsory compliance (Naceur, Marton and Roulet, 2018).
In the same way as the limits set by Basel III in relation with capital adequacy norm or the
liquid ratio would lead to further create various problems in relation with implementation
challenges for EMDEs because of the limited availability of high quality liquid assets. It also
raises difficulty in relation with smaller banks and jurisdiction in relation with calibrating the
framework. Although the capital adequacy norm of the Basel III would be meted, but in respect
to liquidity coverage ratio, it can be counted as one of the major problem in relation with small
economies and EMDEs. This means although it makes safeguarding the banks from financial
distress of the 2007-09 but it may lead to create various problem in relation with the meeting of
its norms in terms of maintaining an adequate proportion of the liquidity or the other aspect.

Likewise, with the aspect to Basel III and its capital adequacy norm the bank need to hold a
higher proportion of capital in relation with the risk which raise the problem of implementation
of Basel III norms. This is because banks in EMDEs and small economy need to issue additional
capital for their fast economic growth and pivotal role played by banks in funding. Likewise,
with respect to maintaining of high capital adequacy norm at the international level, will further
lead to impact the small economy and EMDEs in building up of capital to maintain buffer in
respect to higher market volatility and macroeconomic (Akkizidis and Kalyvas, 2018). In the
same way while compiling with the regulations of the Basel III the credit rating of the banks in
small economies is affected. Thus, it can be said that with regard to the Basel III various
advantage are grabbed by bank but at the same time it creates various problems and challenges.
This means with respect to the Basel III the major problem which arise, is related with its
implementation norms (Feldman and Liu, 2022).
Likewise, it would be right to said that with regard to the Basel III creation of well-
capitalized banks in the US and the Europe is made but it may also lead to reduce the credit
availability and raised cost of credit. With this it has also impacted the bank and the economy as
whole because majority of function of the bank and the economy is designed and depended upon
the credit function of the bank. However, in order to made compliance with the Basel III norms
the banks credit facility and availability is reduced which would have a direct impact towards its
working and functioning. This has also created problem in relation with the level of equity and
its return which means it reduce the proportion of return which is grabbed by the bank.
Suggestions on future resolutions to the problem identified
In order to meet the problem in relation with Basel III it is noted that the small economies
and the EMDEs need to make implementation of changes in the legal framework of the
economy. There are large range of future effective resolutions for analysis of specific resolutions
, where this has been also found to be effective towards maintaining consistent results. This can
be analysed that further extending focus on determined aspects, based on specific vision to
enhance operative focus on new strategies which further will enable in depth analysis. to further
develop new economic strategies, financial development enhanced working vision is diversely
worked on for longer financial stability.
By further bringing change in legal framework of economic conditions, new vision can be
further extended for meeting the problems associated in relation to Basel III. Small economies

and the EMDEs need to also develop implementation of new changes within legal framework
parameters within economy goals for larger wider stability. It can be also analysed that
Also, developing effective economic policies further strengthens working efficacy for countries
to develop timely response to changes. It can be also analysed that for meeting problems in
relation to Basel international regulatory accord, new introduced set of reforms designing will
further mitigate risk with international banking sector. Banks need to maintain proper leverage
rations and keep certain levels of reserve capital on hand, for strengthening the working
expertise. Objective of reforms can be analysed that further it improves banking sector ability for
arising new financial and economic stress whatever source (Lei, 2020).
Reducing risk of spillover form financial sector to real economy will further develop
effective strategically rise on improved working vision. Basel is 2009 international regulatory
accord, which introduces set of reforms that designs to mitigate risk within international banking
sector. Banks maintain proper leverage ratios which keeps certain levels of reserve capital on
hand, where committee provides recommendations on banking and financial regulations
concerned with capital risk and operational risk aspects variedly. The accord ensures financial
institutions have further enough capital on account to absorb new unexpected losses, where this
will also enable new changes to be build on within longer time period.
CONCLUSION
The recent report has concluded in depth analysis on working parameters within financial
institutions, especially for banks where market risk, credit risk and operational risk has been
analysed. Research has further concluded Basel Basel III Accord , requirement for commercial
banks analysis, to hold adequate capital against their risk weighted assets and possible
operational losses. Report also summarized specific recommendations, for various new
amendments within macroeconomic conditions to prioritise stable further advancement.

REFERENCES
Books and journals
Akkizidis, I. and Kalyvas, L., 2018. Final basel III modelling: Implementation, impact and
implications. Springer.
Brastama, R.F. and Yadnya, I.P., 2020. The Effect of Capital Adequacy Ratio and Non
Performing Loan on Banking Stock Prices with Profitability as Intervening
Variable. American Journal of Humanities and Social Sciences Research
(AJHSSR). 4(12). pp.43-49.
Feldman, T. and Liu, S., 2022. A new behavioral finance mean variance framework. Review of
Behavioral Finance.
Irawati, and et.al., 2019. Financial performance of Indonesian’s banking industry: The role of
good corporate governance, capital adequacy ratio, non-performing loan and
size. International Journal of Scientific and Technology Research. 8(4). pp.22-26.
Lei, L., 2020 Behavioural Finance Versus Mainstream Finance. Academic Journal of Business
& Management, 3(11), pp.99-102.
Leo, M., Sharma, S. and Maddulety, K., 2019. Machine learning in banking risk management: A
literature review. Risks. 7(1). p.29.
Naceur, S.B., Marton, K. and Roulet, C., 2018. Basel III and bank-lending: Evidence from the
United States and Europe. Journal of Financial Stability. 39. pp.1-27.
Tursoy, T., 2018. Risk management process in banking industry.
Van Greuning, H. and Bratanovic, S.B., 2020. Analyzing banking risk: a framework for
assessing corporate governance and risk management. World Bank Publications.
Vernimmen, P., Quiry, P. and Le Fur, Y., 2017. Corporate finance: theory and practice. John
Wiley & Sons.
Online references
Basel III: international regulatory framework for banks., 2022. [Online]. Available through <
https://www.bis.org/bcbs/basel3.htm>
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