Basel III: Impact analysis for Indian Banks



Literature Review

A considerable amount of research has been done on Basel III and its probable impacts considering various parameters. One such research study done by Vigneshwara Swamy (2013) estimated the impact of Basel III implementation on Indian banks in terms of loan spread, additional capital required and cost-benefit analysis of Basel III implementation. Some of other research studies are discussed below.
Went (2010) analysed Basel III and its possible effects on banking. He concludes that to reduce the potentially devastating effects of banking crises, Basel III has combined risk-based capital and liquidity standards. However, to have higher liquidity, banks will have to have a higher amount of low-yielding liquid assets than they currently possess. This may lead to lower earnings. To cope with additional capital requirements, banks will need to raise new capital or issue new types of financial instruments. This is likely to bid up the prices of capital as well as the required return. Other ways such as reducing dividend pay outs, etc. can also be explored. All in all, this will lead to reduction in capital costs, funding expenses and equity risk premiums for banks, thus making banks less leveraged.

In their paper, Blundell-Wignall and Atkinson (2010a) have analysed Basel III and its possible effects. They stated that higher leverage of banks in the industry caused the main damage during the crisis. They suggest that instead of a capital requirement, there should be a leverage ratio which should be appropriately designed. This is to eliminate the tendency for banks to design their on- and off-balance sheet items to reduce the capital requirement. This would also remove the pro-cyclicality that is caused by minimum capital requirements; what is left would be only natural pro-cyclicality. To accompany the leverage ratio, they suggest that diversification should be rewarded. Blundell-Wignall and Atkinson (2010a) explain that pillar 2 allows supervisors, in some cases, to override pillar 1 rules if they think it is appropriate. In their paper, they suggest that it is better to let bank managers manage and let the market control. Supervisors already demonstrated in the run up to the crisis that they could not do much to prevent it even if pillar 2 was under effect. Thus, they emphasise more on stronger market discipline under pillar 3. Additionally, in an article in the OECD Journal, Blundell-Wignall and Atkinson (2010b) have again analysed Basel III where they criticised it by stating that fundamental problems like the model’s framework (One size fits all approach), regulatory and tax arbitrage as well as the need for more capital have not been addressed properly under Basel III.

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