University Finance Report: Capital Regulation and Banking Analysis

This report examines the evolution and impact of capital regulations on the banking sector, focusing on the current capital-based regulatory system and its effects on banking operations, systemic risk, and bank returns. It evaluates the proposition that capital regulations have restricted returns and analyzes the impact on lending post-global financial crisis, considering countercyclical banking regulations. The report explores the evolution from Basel I to Basel III, highlighting changes in minimum capital requirements and their implications for financial stability and bank behavior. It also discusses the restrictions imposed by capital regulations on banks, the reasons behind these restrictions, and criticisms of the regulations, providing a comprehensive analysis of the financial landscape.

Running head: MSC PROFESSIONAL ACCOUNTANCY
MSc Professional Accountancy
Name of the Student:
Name of the University:
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Table of Contents
Introduction:...............................................................................................................................2
Consider the evolution of capital regulation and the review the current capital based
regulatory system and evaluate the effect regulation has had on banking operations, systemic
risk, and bank returns:................................................................................................................3
Evaluate the proposition that capital regulations have restricted return and whether regulation
is reduced to the operations of banks:........................................................................................6
Analyse the effect of capital regulation has had on lending in the post global crisis era and
banking regulations countercyclical:........................................................................................10
Conclusion:..............................................................................................................................13
Reference and Bibliography:....................................................................................................15

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Introduction:
The overall assessment is focused on delivering the changing financial regulations,
which has evolved over the period for the banking sector. The assessment also focuses on
detecting the current capital based regulatory system that is used for the banking industry has
relatively helped in improving the level of business, which is conducted by banks. The
significance and effect of the regulations on the operations of the banking system is
evaluated, which could relatively help in understanding the systematic risk and returns
generated by the banks. The major changes made in capital regulation directly allow banks to
conduct adequate business, which is conducted ethically. Evolution of capital regulations is
relatively conducted in the assessment, which allows the detection of relevant effects on
banking operations. The proposition of capital regulations that has restricted the returns of
banks is evaluated in the assessment. Furthermore, the effect of capital regulations on the
lending process of banks is evaluated post-global financial crisis era. This overall evaluation
relatively helps in detecting whether Banking Regulation are Countercyclical.
The analysis of banking operations before and after the financial crisis relatively helps
in understanding the overall regulations that was conducted on banks. This evaluation of
regulatory system would eventually help in understanding the financial condition of banks
and their ability to generate revenue from operations. Furthermore, adequate evaluation on
capital regulations is conducted with its overall evolution, which regulates Financial
Institutions and banks to conduct adequate businesses in the current market.

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Consider the evolution of capital regulation and the review the current capital based
regulatory system and evaluate the effect regulation has had on banking operations,
systemic risk, and bank returns:
The evolution of capital regulations has effectively conducted over the previous fiscal
yes years, where different types of regulations of past to control and the overall systematic
risk involved in banking operations. The evolution of the regulation relatively increased or
started after the financial crisis, which mainly portrayed the loopholes in the current capital
regulation system. Moreover, these economic regulations were held to increase the control on
banks that were greedy enough to ignore their capacity and incur more debt than required.
Capital regulations has relatively improved from Basel I to Basel III, which relatively helps
in reducing the overall occurrence of second financial crisis due to the greediness of banks.
The current Basel III regulations are mainly based on the international capital standard for
banks, which helps in assessing the different levels of risk involved in investments.
Therefore, with the help of Basel III the overall reduction in risk from investments are
conducted, which was previously not present in the banking regulations. On the contrary,
Bruno and Shin (2015) argued that with the implementation of more strict capital regulations
banks are still able to increase their operations by acquiring more risk, while increasing the
chance of default. Berger et al. (2016) further stated that the control measures conducted on
Financial Institutions relatively restrict the banking sector to conduct business, which might
directly hamper the overall capital regulation system of the country.
The focus of the changes on capital regulations was mainly conducted to increase
banks equity capital requirements, which was previously not present and increase the overall
risk of the banks. Moreover, the non-fulfillment of relevant just assessment, which was not
conducted by Basel I was mainly supported by Basel II. Basel II was mainly used for
assessing different types of risk for assets, which relatively helped Bank to reduce their risk

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from operations and conduct ethical business. However, Basel II was updated to Basel III,
which relatively comprised all the regulations that needs to be followed by banks while
conducting business. These capital regulations are a reflection of the conclusion that was
drawn from financial crisis, where the banks became fragile due to the low capital regulations
implemented in their operations. The progress and evolution of the capital regulations was
mainly triggered by the financial crisis, where the actual loopholes in the capital regulations
identified. Hilscher and Raviv (2014) stated that with the implementation of Basel II the
overall unethical measures that could be conducted by banks for increasing their profits
would reduce substantial, which help in protecting the depositor’s money in case of cash
stagnation.
The changes in capital regulations relatively help in improving the overall measures
and structure of banks for the period. Before the financial crisis the overall requirements for
the banks to hold cash, reserves were relatively low, which boosted the banks to increase
their capacity to generate higher Returns. However, after evaluating the mistakes that was
conducted during and before the financial crisis adequate changes in the capital standards
were conducted. The evolution on the Minimum capital requirements that needs to be
followed by the banks to conduct the operation relatively produced the possibility of future
financial crisis. The changes in minimum common equity capital, capital conservation buffer,
minimum Tier 1 capital, minimum total capital and countercyclical buffer regime was a
relatively changed from 2013 to 2018, where the overall projections of the changes are also
depicted. This relatively indicates the overall progress evolution on the capital regulations
that was imposed on banks post financial crisis. Berger, Kick and Schaeck (2014) mentioned
that with the changes in capital regulations the operations conducted by banks became more
prominent and riskless, which eventually help in strengthening the financial sector and
minimizing the chance of another financial crisis.

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The relevant changes in capital standard have been implemented by Basel III, which
would eventually help banks to reduce their overall risk. Moreover, the current capital base
regulatory system relatively falls under Basel III, Tier 1 and Tier 2 ratios, which needs to be
conducted by banking companies to improve the level returns in comparison to risk. In
addition, the method would eventually help in supporting the current capital based regulatory
system used by the banks (Jimenez et al. 2014). The implementation of Basel III relatively
restricts the banks to go beyond their ability to support their operations for generating high
returns. Moreover, Minimum requirements are needed by banks to fulfill conduct business in
the presence of capital regulations without which they would not be provided with the license
to continue their operations. The minimum regulation is mainly implemented by Basel III,
which is continuously changing to Increase new safety and soundness regulation such as new
standards for capital and advantage of banks (Dell'Ariccia, Laeven and Suarez 2017). The
evolution in minimum capital requirements relatively portrays the changing perception of
policymakers regarding the financial stability risk of those, which could hamper operations of
the bank. The current capital regulations are to minimize this is taking capability of banks, as
previously it leads to the financial crisis and cash stagnation.
The regulations imposed on the banking system have relatively affected their
operational capability, while changing the systematic risk and return that it could generate
from operations. The restrictions laid down by the capital regulatory system has mainly
reduced the overall operational capability of banks, which directly helps in reducing the risk
involved in operations. The systematic risk is mainly incurred due to the decision that is
made by banks onto the relevant Investments, which were relatively increases when banks
tend to increase the accumulation of risk to generate higher returns. The current capital based
regulatory system has a relatively helped and improving the operations of the bank while
reducing systematic risk (Laeven, Ratnovski and Tong 2016). Banks now provide loans with

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a proper Understanding of the disk attributes that is in Gulf in providing loans to a certain
individual. This relatively helps in reducing the overall chances of cash stagnation and losses
from operations. The capital regulatory system has been the minimizing the banking
operations to the level which was needed to sustain the financial market. However, this
relatively reduced the systematic risk for the banking sector, while declining its actual
Returns.
The main problems that occurred with the implementation of capital regulatory
systems were the production in returns generated by banks. Banks were not able to increase
their systematic risk to generate high returns, which reduced the profits generated by banks.
In this context, DellʼAriccia, Laeven and Marquez (2014) stated that with low systematic risk
banks could adequately their operations in the financial market, while reducing the chances of
cash stagnation the current regulations are still evolving to support the overall banking
system, while reducing their high risk-taking capability. Therefore, more changes in the
minimum requirement capital and other attributes laid down by Basel III are being conducted
improve the banking system. The overall systematic risk involved in operations of the bank
has a relatively reduced after the financial crisis, where the banks provided loans to anyone
for increasing the returns on investment. The slow systematic risk has a relatively reduced the
return generation capacity of banks in the current era.
Evaluate the proposition that capital regulations have restricted return and whether
regulation is reduced to the operations of banks:
There are many reasons behind the restriction that is imposed by capital regulations
on banks, as it directly helps in reducing the problems that might arise in future. There are
segmented reasons behind the need of adequate regulations for controlling banks or they
might conduct operations to generate higher returns from investment. There were significant

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habits of the Banks, which would be identified as the most problematic condition faced by
capital regulator. From the evaluation, it could be detected that banks have a tendency to take
on higher risk for achieving or enhancing their profits, which relatively increases the risk
from investment. Without regulations, banks would only focus on creating enhancing the
profit while taking on more risk with the capital that is provided by depositors. Moreover, the
regulation also imposed due to the private incentive that is made by bankers for conducting
operations. The bankers tend to increase the compensation and incentives, while conducting
business, which is not adequate according to the regulations. Likewise, the bank use clients’
money to generate profits, which relatively increases their capacity for risk, as the investment
capital is of depositors. Flannery (2016) criticizes that the problems faced by regulators, in
controlling the banking regulations and operations, is persisting, which relatively increases
the chance of another financial crisis. Furthermore, the sophisticated products that are sold by
the banks to the customers have relevant knowledge gap, which relatively favors the bank.
Measure was a relatively scene during the financial crisis, when the faulty CDOs were
transferred from banks to investors without the prior knowledge. Besides, the externalities
make banking a very sensitive business, as a failure of bank would eventually affect the
whole economy due to its operations tangled all around the economy. These are the main
reasons behind the restrictions that need to import on banking before the conduct adequate
business in the economy (Berg and Kaserer 2015).
The current propositions of capital regulations that have been imposed on banks have
adequately restricted them to conduct risky business. Implementation of Basel II and Basel III
Accord has relatively regulated the banking system while imposing different restrictions on
them to conduct business. On the other hand, Khan, M.S., Scheule and Wu (2017) criticizes
that potential negative ramification can be conducted if restrictions on the Banking
Regulation increases, as it might directly transfer into a regulated Shadow banking system.

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This regulated Shadow banking system would eventually hamper the economic condition and
increase the operations in black market. Therefore, it could be indicated that the current
capital regulations that is imposed on operations of Banks is relatively adequate as it helps in
reducing the additional risk that might be accumulated by banks (Baker and Wurgler 2015).
The overall implementation of macro prudential regulations that is conducted on
banks relatively increases the restrictions of activities that need to be ignored by the banks.
Moreover, the restrictions or preventions that are imposed on banks are a measure that is
conducted on a day-to-day control basis for resolving any kind of crisis, which might incur in
future. Additionally, the activity restrictions are conducted where the authorities directly limit
The Financial Institutions actions that could be taken by them. The overall Glass Steagall Act
listed in 1933 mainly sliced the investment banks and commercial banks, which helped in
segregating the operations of the bank and the capability to lend to an individual borrow. the
restrictions on the lending process relatively post the banks to not increase the amount of loan
more than 10% of the banks overall assets for an individual borrower. Acharya and Steffen
(2015) argued that the overall increment in regulations has mainly reduced the operation
capability of banks, while the risk involved in investments is still high, which might in turn
hamper depositor’s money. This restriction relatively allowed the banks to reduce the overall
risk from investment is restricting the loan amount for an individual investor. Likewise,
restrictions imposed by the capitol regulators are only on risk that can be accumulated by
banks for conducting operations. The restrictions of how much are just a bank antique is
conducted by limiting the advantage of the particular Bank. In addition, banks for reducing
the overall risk and advantage from operations needs to increase higher capital accumulation
(Bougatef and Mgadmi 2016).
The capital regulations have mainly indicated the criteria for capital that need to be
implemented by banks, where changes in capital need to be conducted for improving its

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protection. Moreover, the restrictions on banks relatively allow the creditors protection in
case the bank default and is not able to provide the overall loan amount. This restriction
directly changes the overall perspective of banks in conducting business, which in Limit their
capability to conduct business according to that its attributes. After evaluating the capital
regulations restrictions on the operations of banks could be identified, this is conducted with
the help of Basel II and Basel III accord (Gersbach and Rochet 2017). The restrictions are
mainly based on the overall return and risk attribute of the capital regulations, which
relatively reduces the overall capability of the banks to minimize risk from operations. The
capital regulations are only imposed on banks for regulating their operations according to the
measures, which might help in reducing the accumulation of excessive systematic risk within
its operations.
The restrictions relatively reduce the advantage condition of banks while conducting
the business, which helps in safeguarding the overall depositor’s money, which is used by
banks in conducting business. The legislation that is currently present relatively allows banks
to use depositor’s money for conducting business without the consequence of loss. However,
the restrictions of capital regulations relatively minimize the chance of loss that might in
curve by the banks due to gas stagnation. The measures depicted in Basel III relatively
increase the minimum requirements of capital that needs to be present within the operations
of bank to conduct smooth operations (Gambacorta and Shin 2016).
Therefore, the restrictions conducted on bank has a relatively reduced their overall
operations, which reduces financial operations of banks. The restrictions are mainly based on
the operations which increases risk attributes of the bank, which in turn helps in securing the
depositors money. Moreover, the restrictions depicted by regulations mainly decline the
overall operations such as providing loans to individuals and groups. This restriction
relevantly reduces the capability of bank for issuing the entire loan to one individual (Faccio,

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Marchica, and Mura 2016). Furthermore, the preposition of increasing the relevant restriction
on the operations of bank is conducted, where the minimum Capital requirement increased
every year to reduce the substantial risk involved in the banking system. Besides, the input of
capital conversion buffer has relatively helped in maintaining the level of adequate capital
within the banking system. The minimum Tier 1 capital required for the operations has a
relatively increased over the period, which restricts banks to conduct the business. The
minimum total Capital requirement has also increased with the minimum common equity that
needs to be maintained by banks in their financial records. This restrictions and Minimum
requirements that is imposed on banks buy capital regulations has a relatively reduce the
capability of bank to conduct operations (Hugonnier and Morellec 2017).
Analyse the effect of capital regulation has had on lending in the post global crisis era
and banking regulations countercyclical:
The relevant evaluation of the capital regulations on lending process of banking sector
could be identified by evaluating the post and pre-lending conditions of banks. Before the
financial crisis, the overall lending process of banks was relatively different, as their focus
was to maximize their profits from investment. The banks would eventually provide loans to
everyone whoever would approach them for a particular loan without collateral or income
proof. This was mainly conducted to initiate loan with higher interest rate, which could
provide rising profits for the banking system. However, the lending process had relatively
different types of flowers, which was identified after the financial crisis. In this context,
Schepens (2016) stated that banks provided bad loans to individuals and accumulated the
loans on a particular Bond known as CDOs, which led to the decline of image of financial
sectors all around the world. The valuation of bonds was relatively conducted based on credit
ratings, which was always high regardless of risk and return attributes of the instrument. On

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the other hand, Bessis (2015) argued that banks due to the availability of capital from the
market were conducting unethical measure to increase the returns from investment by
transferring the loans from them to the investors.
However, the current lending process is mainly restricted by the capital regulations
imposed on banks, which substantially reduces the risk from Investments. The restrictions on
the lending process have relatively increased with background checks and thorough income
tax of borrowers is conducted before issuing loans. This measure was relatively imposed on
the banking system after the financial crisis, which relatively helped in improving the current
financial position of banks. However, the banks previously would never check the actual
background and income proof of the individuals getting the loans. On the contrary,
Paligorova and Santos (2017) argued that banks were able to manipulate the risk attributes
due to the lack of adequate regulations and monitoring conducted on their operations.
Therefore, the current banking system mainly neglects all the measures that were taken pre-
financial crisis, which reduces the overall risk attributes of the operations conducted by
banks.
After the financial crisis Basel accord was mainly changed and updated to Basel III,
which relevantly has three main pillars such as minimum Capital requirement, risk
management & supervision, and market discipline (Nguyen 2014). These three pillars mainly
help in evaluating the Minimum Requirements That needs to be followed by banks before
initiating the learning process. This relatively minimizes the capability of the banks in issuing
loans to borrow without conducting adequate research and evaluation. With implementation
of the three pillars, there are different attributes of Basel III, which needs to be followed by
banks such as capital base, risk coverage, advantage ratio, and capital buffers. With
implementation of above attributes, the oral bank is relatively restricted to conduct adequate
evaluation before providing loans to the borrower. Moreover, the lending supervision act