International banking law Essay Example | Topics and Well Written Essays - 3750 words

International banking law - Essay Example The objective of the Basel Committee’s reform package is to improve the banking sector’s ability to absorb shocks arising from financial and economic stress, whatever the source, thus reducing the risk of spill over from the financial sector to the real economy (Basel Committee on Banking Supervision, 2009). This paper shall present a critical analysis of the proposals and finally make a determination of its efficacy, practicability and compliance amongst the banking sector around the world. The repeated and continuing onslaught of economic stressors starting from the past decade has left the banking industry more fragile. The Basel Committee on Banking Supervision has long recognized its role in providing guidance not only to banks but also to regulators to ensure that the banking system remains not only resilient in the face of economic slowdown or down turn but also to be more prudent in their fiscal management. The viability of the Basel Committee’s previous recommendations and proposal was regarded as the cure for the ailing global banking industry however, Basel III’s round of proposal are too complex (Allen, Chan, Milne, & Thomas, 2010) BASEL III Proposals Emerging from the three pillars of Basel II that would include (1) risk management; (2) regulatory governance; and (3) corporate governance that aims to ensure the risk sensitivity of capital allocation, quantification and separation of operational risk and credit risk, and lastly to align regulatory arbitrage. Basel III has the following proposal that aim to strengthen the international Banking industry further. 1. Capital Base Learning from its experiences in the past, the banking industry which have faced several global financial crisis have determined that the capital base of some banks are of insufficient quality. Normally these are the banks that are considered as the ground zero of the financial crisis. These banks are then forced to rebuild their capital base at a ti me when it is hard to do so. Governments are then forced to intervene that may save the situation temporarily however the domino effect of the whole financial industry will just make matters worse (Basel Committee on Banking Supervision, 2009). A key element and rationale of this proposal is that common equity is still regarded as the highest quality component of capital due to its peculiar nature of absorbing losses when they occur, full flexibility of dividend payments and lastly it has no maturity date. It makes sense to use it as an instrument to ensure a bank’s liquidity. The proposal also emphasize that the creative way of firming up capital with non-common equity to meet regulatory requirement should be limited. However, regulators should also take into consideration another form of high quality equity that can be converted into common equity these are equity coming from mutual funds and cooperatives. Responding to the growing concern on security the proposal also stre ssed the need for full disclosure of the nature of capitalization. Capitalization Tier 1 capitalization refers to the actual common equity of a bank. In the current practice equity can be in a form of bond, stocks, tradable financial paper and other similar instruments. The very nature of the tradable instruments is the variability of its value. BASEL III has