Money and Capital Market

Basel III is a regulatory standard on the capital adequacy of banks. There are various reasons as to why the regulators decided to move from Basel II to Basel III. In the late 2000s, it was clearly evident that there was a global deficiency in financial regulation (Tarullo 2008). This became evident through the financial crisis at the time. Therefore, the regulators considered a move to Basel III. For example, the calculation of loan risk was unfavorable (Matz 2011). It was the main factor that led to the US sub-prime mortgage crisis. Therefore, the regulators considered a move to Basel III to avoid a credit bubble as in 2007-8.

The other factor that influenced the move from Basel II was the lack of provisions like the need for supervision, as well as agencies which can be vital in credit rating (Shearman 2011). There were no official agencies to rate the credit worthiness of financial bundles and bonds. This led to serious credit risks which left most commercial banks in a fix. Therefore, the move to Basel II is considered where there is the application of a scenario that is more formal (Bessis 2010). This includes the existence of rating agencies and the creation of three scenarios, which are official.

The last fact that prompted the decision to move from Basel II to Basel III was the lack of transparency, consistency and quality of the capital base. This is because Basel III would support the harmonization of instruments and dictate that the capital of the banks should be the retained earnings and the common shares (Gregoriou 2009). There was also the issue of the bank directors being in the dark on liquidity of the assets. Basel III was also considered to deal with this problem. It would require the bank directors to have vast knowledge of the conditions of market liquidity for the main asset holdings. This would solve the problem of the lack of accountability for capital losses (Viney 2012).