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Basel III—what’s on the menu (Part II)

A primer on what Basel III offers, what it promises and what challenges and costs it creates for banks and the economy

February 24, 2011 | Aditya Puri
Before going into the semantics of what the Bank for International Settlements (BIS) is proposing with Basel III, I would say that the new accord is an encouraging and well thought through response to the credit crisis.  I am personally in favour of Basel III although I feel it needs fine-tuning before implementation.

Basel III takes each “feature” of the credit crisis and puts in place a specific ruling that appears on the surface to be well adjusted and carefully connected to the context of the overall Basel framework. It is a pity that some national regulators didn’t have the patience or diligence to wait or work more closely with BIS.  One is left feeling that the Volcker Rule may end up dejecting the American banking sector and that the British Government might throw the baby out with the bath water if it pulls Financial Services Authority (FSA) apart .

What isn't changing?

Let's start with what is not changing. 

The good news is that Basel III should be seen as an extension of Basel II, so all the work that has been done for Basel II is valid.  The Internal Ratings Based (IRB) approach and even the foundation approach for credit all stand in Basel III.  In respect of specific risk disciplines, the emphasis on operational risk and market risk is not heavy at all in this new mandate. There is a small overlap with market risk and pricing Credit Valuation Aadjustments (CVA) into capital charges or to be specific, "banks can use the market risk internal models approach for CVA models": section 98, BIS.  Nonetheless much of the agenda for market risk in Basel III lie away from the style in which this core discipline has been presented in the past.
The key to understanding the emphasis BIS is looking for from this initiative, as with any of its programs, can be found in the noise it makes when it communicates a formal announcement.  The documents listed below w...

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