{"id":264271,"date":"2023-10-13T17:01:23","date_gmt":"2023-10-13T17:01:23","guid":{"rendered":"https:\/\/forumias.com\/blog\/?p=264271"},"modified":"2023-10-13T17:01:23","modified_gmt":"2023-10-13T17:01:23","slug":"will-bankers-ever-learn-on-proposed-changes-to-basel-iii-norms","status":"publish","type":"post","link":"https:\/\/forumias.com\/blog\/will-bankers-ever-learn-on-proposed-changes-to-basel-iii-norms\/","title":{"rendered":"Will bankers ever learn? – On proposed changes to Basel-III norms"},"content":{"rendered":"\n

Source<\/strong>: The post is based on the article\u00a0\u201cWill bankers ever learn?<\/strong>\u201d published in <\/strong>Business Standard <\/strong>on 13th<\/sup> October 2023<\/strong>.<\/p>\n

Syllabus: GS 3 \u2013 Indian Economy \u2013 Money & Banking<\/strong><\/p>\n

Relevance: <\/strong>About proposed changes to Basel-III norms.<\/p>\n

News: <\/strong>US regulators are proposing some changes to capital requirements under Basel-III norms<\/a>.<\/p>\n

What are the proposed changes?<\/strong><\/h2>\n

Banks with assets over $100 billion must use standardized models<\/strong> for credit and operational risk capital instead of internal models.<\/p>\n

For market risk,<\/strong> these banks must calculate risk-weighted assets using both standardized and model-based methods, opting for the higher figure.<\/p>\n

Additionally, they would have to account for unrealized gains or losses on available-for-sale securities<\/strong>.<\/p>\n

These changes are expected to boost bank capital, which is viewed as a positive development.<\/p>\n

How is this new change different from the previous one?<\/strong><\/h2>\n

Previously:<\/strong> Under Basel-II norms, banks could use internal risk-based (IRB) models<\/strong> to capture their specific risks. Banks that effectively managed risk could have lower capital requirements<\/strong> using IRB models than the standardized models.<\/p>\n

However, regulators are reconsidering the use of IRB models due to issues during the Global Financial Crisis (GFC) and decided to reduce reliance on IRB models in Basel-III norms.<\/p>\n

Current Proposal:<\/strong> American regulators are preferring standardized models for credit and operational risk while keeping internal models for market risk.<\/strong>\u00a0Standardized models assess risk based on average risk experience.<\/p>\n

This shift may also prompt the Reserve Bank of India (RBI) to reconsider its move towards using internal models for credit loss estimation.<\/p>\n

The new US proposals are centered on the idea that more equity capital for banks is safer.\u00a0However, this idea is being opposed by some of the experts.<\/p>\n

What are the arguments against the proposal?<\/strong><\/h2>\n

First,<\/strong> critics argue that increasing capital requirements for banks would make it more expensive for banks to lend money, which would lead to higher interest rates for borrowers.<\/p>\n

However, this is not necessarily the case<\/strong>, because banks are currently able to borrow money at lower rates than they should be. Hence, the concerns for lending money at higher rates won\u2019t arise.<\/p>\n

Second,<\/strong> critics argue that increasing capital requirements for banks will lead to lower returns on equity and make bank stocks less attractive to investors.<\/p>\n

However, this is not true, because a bank’s stock price is determined by its price\/earnings ratio (P\/E) and earnings per share (EPS).<\/strong><\/p>\n

Further, when equity requirements rise, EPS tends to decline, but banks with higher equity are seen as safer by investors.<\/strong><\/p>\n

Moreover, worldwide, banks hold capital well above regulatory requirements. In the US, the average capital adequacy exceeds 16% against an 11% requirement, and Indian private banks maintain a 19% capital adequacy versus 12%.<\/p>\n

Hence, banks with higher capital also tend to enjoy higher valuations<\/strong>.<\/p>\n

What can be the way ahead?<\/strong><\/h2>\n

Bankers resist higher regulations due to their bonuses being linked to return on equity (ROE).<\/p>\n

Hence, to address this concern, boards could shift the performance metric from ROE to return on risk-adjusted capital,<\/strong> as relying on excessive debt for higher ROE is not sustainable.<\/p>\n","protected":false},"excerpt":{"rendered":"

Source: The post is based on the article\u00a0\u201cWill bankers ever learn?\u201d published in Business Standard on 13th October 2023. Syllabus: GS 3 \u2013 Indian Economy \u2013 Money & Banking Relevance: About proposed changes to Basel-III norms. News: US regulators are proposing some changes to capital requirements under Basel-III norms. What are the proposed changes? Banks… Continue reading Will bankers ever learn? – On proposed changes to Basel-III norms<\/span><\/a><\/p>\n","protected":false},"author":10320,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"jetpack_post_was_ever_published":false,"footnotes":""},"categories":[1],"tags":[10503,216,8184],"class_list":["post-264271","post","type-post","status-publish","format-standard","hentry","category-uncategorized","tag-business-standard","tag-gs-paper-3","tag-indian-economy","entry"],"jetpack_featured_media_url":"","views":{"total":2,"cached_at":"","cached_date":1698418303},"jetpack_sharing_enabled":true,"_links":{"self":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts\/264271","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/users\/10320"}],"replies":[{"embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/comments?post=264271"}],"version-history":[{"count":0,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts\/264271\/revisions"}],"wp:attachment":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/media?parent=264271"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/categories?post=264271"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/tags?post=264271"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}