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  Basel III, Liquidity Coverage Ratio, and the Financial Crisis
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Ophav

 Ophav:
Sørensen, Yvonne1, Forfatter
Keiding, Hans2, Vejleder
Tilknytninger:
1Det Samfundsvidenskabelige Fakultet, Københavns Universitet, København, Danmark, diskurs:7001              
2Økonomisk Institut, Det Samfundsvidenskabelige Fakultet, Københavns Universitet, København, Danmark, diskurs:7014              
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Indhold

Ukontrollerede emneord: Basel III, Liquidity Coverage Ratio, Financial Crisis
 Abstract: This thesis addresses the regulation accord Basel III, from the Bank for International Settlements subdivision the Basel Committee on Banking Supervision, and its new requirements for the liquidity risk, the liquidity coverage ratio. The Basel III was made as a response to the financial crisis that erupted in 2007, and its goal is to manage the capital required to control the credit, market, operational, and liquidity risk and the potential losses associated with these risks.

There have been many explanations as to why the financial crisis erupted, and this thesis gives an overview of some of them. The basic theory behind bank runs and bank failures are touched upon to give an idea as to why so many large banks could fail. The things happening in the banking system leading up to the crisis is then explained: The interbank market stop working because of high counterparty risk, lack of transparency and precautionary hoarding of liquidity. The banks started to invent new methods to hide their risk and thereby not needing to hold large amounts of capital. To do this they, among other things, started to pack their loans and passing them on to offload their own risk, adopted the trading book and used it extensively, and invented shadow banking. What kind of capital he banks raised leading up to the crisis, what losses they occurred and what amounts of dividend they paid out is also mentioned: many of the banks continued to pay out dividends during the crisis, even those who later closed.

The thesis ends in two discussions that give an answer to the two following questions:
1.  Would a higher level of liquidity have prevented the closing of so many large banks?
2.  Should the regulation of liquidity be a part of the Basel set? Why, why not?
The first discussion is a thought experiment where I let the crisis roll as it did and only changes the level of liquidity in the financial institutions to answer question 1. I find that all the things happening leading up to the crisis would only have been slowed down, but would have ended out in the same result. But I also conclude that a liquidity coverage ratio might be good for regulation in the future.
In the second discussion I go through many of the effects the increased requirements would have on the banks’ incentives to maintain the requirements in Basel III. I also go through the effects the liquidity coverage ratio would have on preventing another financial crisis. And I look at the incentive to actually implement to Basel III accord. I end up concluding that there are many pros and cons towards the liquidity coverage ratio, but if the banks actually maintain the requirements and not find alternatives to hide and move their risks the liquidity coverage ratio will have a positive effect. However, looking at the history there is a high probability that the banks will find a way around implementing and maintaining the requirements because of a tradeoff between security and costs. And therefore there may be a need for other kinds of regulation and initiatives to prevent another financial crisis.
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Thesis(1).pdf (Hovedtekst)
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Copyright dato:
2013-10-10
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De fulde rettigheder til dette materiale tilhører forfatteren.
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Basal

Bogmærk denne post: https://diskurs.kb.dk/item/diskurs:52933:1
 Type: Speciale
Alternativ titel: A discussion about the necessity of the Liquidity Coverage Ratio
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Detaljer

Sprog: English - eng
 Datoer: 2013-10-07
 Sider: -
 Publiceringsinfo: København : Københavns Universitet
 Indholdsfortegnelse: 1. Introduction . 1
1.1. Problem . 1
2. Bank Runs and Deposit Insurance 2
3. What happened? .. 8
3.1. Interbank market 8
Figure 1 – Equilibrium outcomes as a function of the level and dispersion of counterparty risk. 10
3.2. New banking methods.. 12
3.3. Capital raised, dividends and losses .. 16
4. The Basel Committee on Banking Supervision 18
4.1. Basel II .. 18
4.2. Basel III . 21
Figure 2 - Timeframe for implementation of minimum levels of LCR . 25
5. Liquidity Coverage Ratios vs. the Financial Crisis .. 27
5.1. Effects on the interbank market . 27
5.2. Effects on banking methods .. 28
5.3. Effects on dividend payouts and capital . 30
5.4. Part conclusion . 31
6. Basel III and Liquidity Coverage Ratio vs. Necessity . 33
6.1. Overview of the development of Basel II to Basel III 33
6.2. Discussion about Basel III, regulations and the LCR .. 35
6.3. Perspective on regulations in the future . 39
7. Conclusion . 42
Literature .. 43
Appendix 1 45
Table 1 - Capital Raised by Type of Capital for 25 large financial firms from 2000 – 2006 45
Table 2 - Total Capital Raised by Type of Capital for 25 large financial firms from 1Q07 to 4Q09 46
Table 3 - Quarterly Dividends paid by each US Bank 47
Table 4 - Semi Annual Dividends paid by each non-US Bank 48
Table 5 - Quarterly Losses incurred by Large Financial Firms .. 49
Appendix 2 50
Table 6 - Basel III phase-in arrangements .. 50
 Note: -
 Type: Speciale
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