INTERNATIONAL STANDARDS FOR BANK CAPITAL REGULATION

V Kovalenko,K Gonchar,F Murshudli,S Sheludko,N Radova

doi:10.18371/fcaptp.v1i36.227609

Abstract

Abstract. The paper analyzes the evolution of the introduction of international standards for bank capital regulation. The aim of the research is to study international standards for bank capital regulation and their impact on financial stability and sustainability of domestic banking systems. The 2007—2009 Global Financial Crisis was perhaps the greatest banking and financial crisis since bank failures and the financial panic of the Great Depression in early 1930s. According to academics and professionals, there has been much debate over the last decade as to whether the 2007—2009 banking crisis was primarily a solvency crisis or a liquidity crisis. Capital adequacy of banks today is the main indicator of increasing society’s confidence in banking systems. The flexible and balanced implementation of Basel Committee on Banking Supervision (BCBS) recommendations on the assessment of bank capital adequacy is of particular importance in the context of the deepening economic crisis caused by COVID-19 quarantine restrictions. Regulation of bank capital is primarily settles by the ability to execute basic functions inherent in it. A number of shocks in connection with the crisis require the renewal and search for a new paradigm of regulation, which today is focused on achieving financial stability, overcoming pro-cyclicality, especially in the banking sector. One of the latest developments in the field of bank capital regulation has been the implementation of international banking supervision standards recommended by BCBS, which have been transformed from Basel I, Basel II, Basel III, Basel 3.5 to Basel IV. The new ideology suggests that in times of financial and economic crisis or in anticipation of growing uncertainty in the economy, it is necessary to abandon the idea of bank capital management and the creation of financial reserves to maintain liquidity and stability of financial institutions. These measures will not be able to protect the bank from default and bankruptcy. This ideology has become a new paradigm of effective banking regulation, which can be formulated as an accepted set of three vectors: risk; risk management; risk-oriented supervision. Keywords: bank capital, international standards, financial stability, liquidity, banking crisis, banking regulation. JEL Classification E44, F30, G15, G21 Formulas: 1; fig.: 4; tabl.: 3; bibl.: 22.

Highlights

The importance of standards in the field of financial services is explained by their extension to all segments of the population and types of organizations
A number of shocks in connection with the crisis require the renewal and search for a new paradigm of regulation, which today is focused on achieving financial stability, overcoming pro-cyclicality, especially in the banking sector
One of the latest developments in the field of bank capital regulation has been the implementation of international banking supervision standards recommended by Basel Committee on Banking Supervision (BCBS), which have been transformed from Basel I, Basel II, Basel III, Basel 3.5 to Basel IV

Summary

Introduction

The importance of standards in the field of financial services is explained by their extension to all segments of the population and types of organizations. The Basel III agreement on the completion of post-crisis reforms, dated December 2017, largely solves the incentive problems associated with banks’ minimizing the estimated risk weights using their own internal models, in order to minimize regulatory capital requirements To mitigate these incentives, so-called floors have been set: the percentage of standard risk weights set by supervisors below which capital cannot decline (BCBS, 2017) [5]. Banks can either apply a standardized approach (SA) based on risk weights determined by supervisors or recognized rating agencies, or use an internal rating model (IRB) which allows to set bank’s own risk weighting criteria This means that banks can have a direct impact on the final level of required regulatory capital. The regulatory requirements introduced after the crisis of 2007—2008 may justify themselves

Conclusions

Findings

Basel IV