Ever since the global financial crisis hit the world economy in 2008, Basel Committee on Banking Supervision (BCBS) has been instrumental in suggesting regulations which will largely enhance the banking system’s ability to absorb economic upheavals. The suggested Basel-III regulations are an improved version of the earlier Basel-II banking regulations. It primarily emphasizes the need for additional capital, liquidity maintenance and leverage ratio requirements. The requirement of additional capital is associated with the cost of capital. This paper is an effort to carry out a cost-benefit analysis of Basel-III implementation for Indian banks.
The first part of this paper provides a brief background of Basel regulations. Earlier studies carried out in this field are reviewed and presented in the subsequent sections. Based on the past trend and suggested Basel-III accord, the paper quantifies the additional capital required by Indian banks by March-2019. The possible losses are quantified in terms of possible loss in GDP in case a financial crisis hits the economy as on date. The findings, scope for further research and limitations of the study are mentioned in the concluding part of the paper.
The international financial markets were badly hit in 1974 due to the Herstatt Bank incident. On account of making wrong bets on the US Dollar, the Herstatt Bank had accumulated losses of Deutsche Mark (DM) 470 million by June, 1974 against capital of only DM 44 million. This caused the German regulators to stop operations of the bank on June 26, 1974. The bank had received payments in Deutsche Mark which were to be delivered in New York in US Dollars; however, due to termination of operations of the bank on closure of business hours at 16:30, the Herstatt Bank could not complete this transaction although it was 10:30 hours in New York. Thus, counterparty banks could not receive their US dollar payments. .Read Full Article