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Policy Brief 209 - Financial Reform Basel III: progress and future challenges (January 2011)

Policy Brief 209 - Financial Reform Basel III: progress and future challenges (January 2011)


Financial reform Basel III: progress and future challenges


  •   Prudential risk to the test sytémique
  •   Measures Basel III
  •   A moderate impact on the cost of intermediation
  •   The risk of adverse effects related to a capital requirement increased
  •   Macro-prudential must rely on the competitive functioning of financial markets

The banking and financial crisis that began in 2007 revealed flaws in both American and European systems. After the State intervention to contain the crisis, structural reforms be implemented gradually (Dodd-Frank, Basel III, European financial supervision package). They induce significant changes in the regulation of traditional banking and financial sectors and markets previously poorly controlled (hedge funds, OTC markets).

This study confirms the need to stem the spread systemic financial risk by increasing prudential ratios. The immediate cost of these requirements is offset by the lower occurrence of major crises. The additional cost incurred by a strengthening of capital requirements on bank liabilities does not necessarily have a strong upward impact on the cost of intermediation.

The strength of liabilities can in turn limit the cost of bank resources and prevent liquidity crises. The equity financing banks might finally be facilitated by greater transparency on the quality of balance sheets, including through more systematic practice of stress testing.

The tightening of standards on banks alone there are nevertheless risks that lead to stress the need to extend prudential requirements to other market participants. If the scope of these standards remains too narrow, the banks will be tempted to renew the off-balance techniques. At the extreme, there is a risk that migrate from one activity to the credit of the financial system with little or no regulated ("shadow banking"). Finally, the establishment of standards over a wide area must be accompanied by a reflection on the desirable degree of concentration of banking and business segmentation. The new architecture of European financial regulation should integrate all these dimensions.

  •   Author: Ben Jelloul Mahdi , Department of Economics-Finance.

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