Thinking beyond Basel III: Necessary solutions for capital and liquidity

In previous studies, the OECD has identified the main hallmarks of the crisis as too-big-to-fail institutions that took on too much risk, insolvency resulting from contagion and counterparty risk, the lack of regulatory and supervisory integration, and the lack of efficient resolution regimes. This article looks at how the Basel III proposals address these issues, helping to reduce the chance of another crisis like the current one. The Basel III capital proposals have some very useful elements, notably a leverage ratio, a capital buffer and the proposal to deal with pro-cyclicality through dynamic provisioning based on expected losses. However, this report also identifies some major concerns. For example, Basel III does not properly address the most fundamental regulatory problem that the ‘promises’ that make up any financial system are not treated equally. This issue has many implications for the reform process, including reform of the structure of the supervision and regulation process and whether the shadow banking system should be incorporated into the regulatory framework and, if so, how. Finally, modifications in the overall risk-weighted asset framework are suggested that would deal with concentration issues.