Basel III and Beyond - Will the Proposed Standard Have the Disired Effects?

Abstract

This literature study examines the new Basel III standard for bank regulations. A careful examination of the sub-prime crisis is put in relation to the new standard and relevant literature on the subject. A critical approach is presented examining various drawbacks and undesired effects that can result from the rules. It remains unclear if more complexity in the new rules will add to systemic risk or if they will help to prevent new crises similar to the one seen in 2007-2008. Recent awareness has been given to the fact that many arguments from the banking sector, concerning social costs for capital requirements, are based on common misconceptions about capital in banks. Before any more conclusions can be drawn, in the light of recent theoretical clarifications, a careful empirical study would need to make better estimations of costs imposed by higher capital requirements, relating them to potential benefits of a safer system, with the purpose of improving policy recommendations.