How The Replacement Of Basel Ii By Basel Iii Has An Effect On Economic Growth

After the recent crisis, the Basel Committee decided to create a new regulatory framework, Basel III. This is because the recession demonstrated the inability of Basel II accord to prevent the economic crisis. Basel III on the other hand, has come to rectify all these weaknesses, however its focus is on liquidity risk and on regulatory capital requirements. For this reason, Basel III makes changes on capital definition and has increased the capital charges for derivatives and securities. Also, Basel III has introduced the liquidity and coverage ratio that the former is separated into Liquidity coverage ratio (LCR) and Net stable funding ratio (NSFR), which their main objective is to increase liquidity during economic stress periods. Even though Basel III has not been fully implemented and it’s under construction, its main provisions of capital requirements, liquidity coverage ratio (LCR), Net stable funding ratio (NSFR) and the leverage ratio have been criticized as increasing the cost of bank lending to borrowers. Finally, it is argued that Basel III could have a dampening effect on economic growth.