Basel III, the Devil and Global Banking

by Chorafas, Dimitris N.

• ISBN13: 9780230353770
• ISBN10: 0230353770
• Format: Hardcover
• Copyright: 2011-12-15
• Publisher: Palgrave Macmillan

Summary

The banking industry extensively lobbied against Basel III and governments have been keen to delay its full implementation. Chorafas' latest book takes a well-rounded approach on Basel III's strengths and weaknesses and explains how, without deep restructuring of the global banking industry, (like Basel II) Basel III will fail.

Author Biography

DIMITRIS N. CHORAFAS has advised financial institutions and industrial corporations in strategic planning, risk management, computers and communications systems, and internal controls since 1961. More than 8,000 banking, industrial and government executives have participated in his seminars in the USA, the UK, Germany, Italy, Asia and Latin America. Dr Chorafas is the author of more than 150 books, all critically well-received, and some of which have been translated into up to sixteen languages.

Table of Contents

List of Tables and Figures	p. viii
Introduction	p. ix
The Financial Crisis is Shaping Regulatory Reform
Basel III: An Overview and a Warning	p. 3
A bird's eye view of Basel III capital rules	p. 9
The concept underlying modern regulation	p. 6
The devil is in the detail of all decisions	p. 9
What the book offers the reader	p. 13
The Perpatual Motion of Global Finance
Finance and Banking Are Time and Motion Machines	p. 19
The central bankers' trilernma	p. 19
Effects of the 'New Economy' on the financial time machine	p. 22
Expanding financial markets and their scams	p. 25
Novel financial instruments and their challenges	p. 28
Regulations do not match the complexity of derivatives markets	p. 31
Dark pools, special purpose vehicles and flash crash	p. 34
The activities of lobbyists	p. 37
Global Banking and Systemic Risk	p. 40
Globalized finance is not a branch of international trade	p. 40
Global banking's challenges and the Financial Stability Board	p. 42
Contagion from global crises and systemic risk	p. 46
Regulatory arbitrage	p. 49
Gaming Tier 1 capital should be a criminal offense under Basel III	p. 53
Banks too big to be saved should be allowed to fail	p. 55
Basel III Is a Grand Compromise, Not a Bold Initiative	p. 60
Basel III should not repeat the errors of Basel II	p. 60
Contingent convertible instruments	p. 64
A snapshot of new regulatory rules in the making	p. 67
Management's accountability with capital adequacy	p. 70
Gaming Basel III through arbitrage and speculation	p. 73
DTAs: the Japanese spoke in the wheel of capital adequacy	p. 76
Minority interests, mortgage serving, capital for contingencies, pension deficits, intangible assets and leverage ratios	p. 79
Basel III and the Notion of Global Risk
Is It Possible to Regulate a Global Financial Market in Perpetual Change?	p. 85
The need for a supervisory authority has been present since antiquity	p. 85
The regulator's arsenal is never really complete	p. 87
Is the banking industry ahead of the regulator?	p. 90
Which organization and structure for effective global regulation?	p. 92
Redefining important Pillar 2 risks	p. 95
The concept of market discipline and the CDSs' contribution	p. 98
The Board's watch over compliance	p. 102
Capital Adequacy and Liquidity: the Devil is in Their Detail	p. 105
Unless we learn from this crisis, we shall repeat the same mistakes	p. 105
The all-important Tier 1 capital	p. 108
Capital buffers for countercyclical events and credit bubbles	p. 111
Assuring greater liquidity than is available at present: LCR and NSFR	p. 114
It is time to face the music: the banks have to raise cash	p. 117
Solvency, liquidity and the effects of massive securitization	p. 120
Home-Host Issues Haunt Bankers and Regulators	p. 124
Home-host issues defined	p. 124
Financial globalization is no bed of roses	p. 128
Are the home criteria applicable to the long list of hosts?	p. 131
Home-host issues are at the heart of financial integration	p. 136
After-effects of innovation, derivatives trades and deregulation	p. 139
Global risk capital and home-host supervision	p. 141
Risk Management Needs A New Culture
The Concept of Risk Management Must Be Thoroughly Revamped	p. 147
Personal accountability	p. 147
Principal risks	p. 150
Risk factors	p. 154
Independence of opinion and transparency	p. 157
Event risk	p. 160
The long tail of risk distribution	p. 163
Stress testing	p. 167
Correlation Risk Overwhelms the Global Banking Industry	p. 171
The correlation coefficient	p. 171
Working with correlations	p. 174
Counterparty correlation risk	p. 178
Risk concentration and the diversification hype	p. 181
Default correlation	p. 184
Correlations change over time, and must be revised regularly	p. 187
Backtesting and benchmarking correlations	p. 191
Risk Control Requires Authority, Goals and Organization	p. 195
Risk control and the effect of asymmetries	p. 195
Risk control lessons from a failure: Fannie and Freddie	p. 198
Organizational and personal prerequisites for effective risk control	p. 202
Risk management is a meta level of quality control	p. 205
The philosophy underpinning risk control limits	p. 209
The importance of rigorous accounting standards	p. 213
Base III Should Also Address Big Spending By Central Banks
By Salvaging Overleveraged Banks, Sovereigns Propagate Global Systemic Risk	p. 219
Collusion between sovereigns and the banks	p. 219
The bail-ins of taxpayers and investors	p. 222
The biggest problem is the mass effect	p. 225
There is no alternative to fiscal discipline	p. 228
Big bank bail-outs have been the ruin of sovereigns	p. 231
Forward, backward and forward again in financial regulation	p. 234
Risks taken on by gamblers acting legally inside the system	p. 238
What Is the Point of Central Banks' Interventions?	p. 241
The independence of central banks is a myth	p. 241
Personalities, not scripts, assure central banks' independence	p. 244
Measures by central banks have been ineffectual	p. 246
The 'negative synergy' of monetary policies	p. 249
The power over the economy: funds rate, discount rate and inflation	p. 252
Deposit insurance and bad banks	p. 256
The troubled assets relief program	p. 259
To save or not to save failed banks?	p. 261
Conclusion: the perfect storm	p. 265
Epiloge	p. 267
Notes	p. 270
Index	p. 283
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