What’s so new about the new Basel III?

By Shahan Arshad

Although Basel III has more regulations than the ones stated but the question in everyone’s mind is that Basel II was supposed to protect us from crises like the one in 2008, so how can we be sure that Basel III will succeed where Basel II didn’t?

In the ever evolving financial world it’s no surprise that industry experts have ventured to Basel III. Its efficacy, however, is yet to be judged by its critics and proponents alike. But why did the experts felt a dire need to create this new Basel III, let’s review some of the reasons.

Why it came about?
In simple words: because Basel II accords were insufficient to prevent banks from excessive risk taking, resulting in the financial crisis of 2007–2008.

So what’s new in Basel III?
For one thing, it tightens banks’ capital requirements. It also requires higher weights for risky assets bringing more assets under the Risk Weighted Assets (RWA) calculations, which itself is modified under the new accords and is even said to demand a higher quality of capital; although how they’re going to achieve that last one is bit dicey. Basel III also tightens liquidity requirements and is expected to be implemented in phases with full compliance in 2019. A common list of what Basel III has changed versus Basel II is given below:

Basel II Basel III
Common equity requirement 2% Raised to 4.5%
Tier 1 Capital 4% Raised to 6%
Tier 2 Capital 4% Reduced to 2%
Can include hybrid capital requirements Tier 1 capital can no longer include hybrid capital requirements
Tier 3 Capital requirements Tier 3 capital eliminated
No capital conservation buffer Introduction of capital conservation buffer at 2.5% of tier 1 equity
No counter cyclical buffer Introduction of counter cyclical buffer at 0 to 2.5% of Risk Weighted Assets during high credit growth.
  Trade finance risk weight increased to 100%
  Liquidity coverage ratio to be increased to greater than 100% (requires a bank to hold sufficient liquid assets to cover its total net cash outflows over 30 days.)
  Leverage ratio to be greater than 3%
  Results of stress testing to be reported in financials
  Credit valuation adjustment capital charge to be applied to cover Mark-to-market losses on risk to OTC derivatives.
  Net Stable Funding Ratio to be greater than 100% (requires available amount of stable funding over a one-year period of extended stress)

Although Basel III has more regulations than the ones stated but the question in everyone’s mind is that Basel II was supposed to protect us from crises like the one in 2008. Not to sound cynical but that failed, so how can we be sure that Basel III will succeed where Basel II didn’t? Well for one thing, regulation is an ongoing, evolutionary process. Basel III is meant to plug in the holes left by Basel II. However, the more holes we plug in, the more new ones seem to pop up or more accurately, the ones overlooked become visible. The world economy and financial markets are dynamic and eve revolving ecosystem with players of all kinds.

In military aircraft training, pilots talk about countermeasures to missile fire, and then there are counter-countermeasures and then those counter-countermeasures have countermeasures of their own and so on. For example, a heat seeking missile has a countermeasure called flare deployment meant to confuse the missile. So the counter-countermeasure tells the missile computer to seek the heat signature which is higher i.e. that of the jet. So the pilot again deploys flares which have a higher heat signature and then the missile computer tells it to target the lower heat signature (the counter-counter-counter-countermeasure) and so on. Although this is just an empirical example, the purpose is to illustrate how banks and regulators, in the world of finance, will always find loopholes to increase their bottom-line, and someone will then try to plug in those loopholes, and then the newer, unnoticed loopholes will be found and then those will be  plugged and so on ad infinitum. The process will go on; the point is not to find a perfect system that would cause our search to come to a standstill but rather a journey that sees us evolve with changing circumstances. The important thing in this ever evolving process is due diligence that be maintained at all times.

Shahan Arshad is a final year MBA student at KSBL(Karachi School for Business and Leadership). You can find him on Twitter @Shahankhan8

Educationist: ‘Either go for revolution or evolution’

By Sumaira Jajja

“Education is never wasted and for Pakistan to prosper, education must be the topmost priority of the government,” says Dr Shaukat A. Brah.

His statement might strike one as sheer rhetoric but a glance at his credentials states otherwise. Hailing from Lahore with a PhD from University of Houston, Dr Brah is a Professor of Operations Management and Dean of Karachi School for Business & Leadership (KSBL). He was the former dean of the Suleman Dawood School of Continue reading

Strategising for Competitive Advantage

KSBL Executive Education Services is organizing a course on Strategising for Competitive Advantage from February 27-28 and March 1, 2013. The course will be led by Dr Kamal Munir and Dr Imran Ali. Dr. Kamal Munir is the Reader in Strategy & Policy, and Head of the Strategy & International Business Group at Judge Business School, Cambridge University. He completed his PhD at McGill University. His practical experience includes consultant/trainer for several organisations including the World Bank; the Department of Trade and Industry, UK; the Asian Development Bank, McKinsey & Co among others.  Continue reading

Financial Acumen for Non – Financial Executives

After successfully conducting its first executive education programme of 2013 on Successful Project Management, KSBL Executive Education Services is organising the second programme on Financial Acumen for Non Financial Executives from February 19-21, 2013. Dr. Zeeshan Ahmed- Associate Professor, KSBL- will lead the programme. Dr. Zeeshan has over ten years of diverse experience including training, research and consultancy experience. After completing his MBA from IBA Karachi, he worked as a management consultant with Ferguson Associates, an affiliate firm of PricewaterhouseCoopers. Continue reading

Successful Project Management

KSBL Executive Education Services is organising a programme on Successful Project Management from January 29-31, 2013. The programme will be led by Dr. Rizwan Amin Sheikh- Associate Dean, MBA Programme, KSBL. He is a certified Project Management Professional (PMP) from Project Management Institute (PMI), USA. He completed his Ph.D at SKEMA Business School (France), MBA from Cleveland State University (USA) and B.Sc. from Ohio State University (USA). Dr. Sheikh has over 21 years of management consulting (Deloitte Consulting, USA), international program / project management, executive training, teaching, ERP implementations, supply chain management, and industry experience. Continue reading

Women & Workplace Communication – The Secrets to Success

Ms. Saira Ibrahim, Registrar and Head of Financial Aid Office at KSBL, was invited as a Guest Speaker at a Symposium on “Women in Workplace”, organized by the NED University of Engineering &Technology.  The purpose of the seminar was to highlight the facts onhow women tackle different issues in their professional life, whilst successfully achieving work-life balance. Continue reading

KSBL Welcomes the Inaugural MBA Class

KSBL welcomed the Inaugural MBA Class at a prestigious Orientation Ceremony organized at our newly commissioned campus. The event was attended by the incoming MBA students, their parents and the KSBL Board of Directors. The programme began with a welcome address by Dr. Shaukat Brah, Dean KSBL, who emphasized on MERIT as the most important criterion for all activity at KSBL. He also underlined Continue reading

KSBL’s First Research Article Published

Dr. Nadeem Javaid, Assistant Professor, Karachi School for Business & Leadership (KSBL), along with Pier Paolo Saviotti, University Pierre Mendés & GREDEG-CNRS, France published a research article titled ‘Financial System and Technological Catching Up: An Empirical Analysis; Is there a recipe for Increasing the Export Variety of Nations?’ in The Journal of Evolutionary Economics. It is the first research journal publication from KSBL faculty. Journal of Evolutionary Economics is a well-reputed journal with 1.0 impact factor and Continue reading