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Bank business models and the Basel system: …
OECD Journal: Financial Market Trends 2014 Volume 2013/2 OECD 20141 Bank business modelsand the Basel system : Complexityand interconnectednessbyAdrian Blundell-Wignall, Paul AtkinsonandCaroline Roulet*The main hallmarks of the global financial crisis were too-big-to-fail institutionstaking on too much risk with other people s money: excess leverage and defaultpressure resulting from contagion and counterparty risk. This paper looks at whetherthe Basel III agreement addresses these issues effectively. Basel III has some veryuseful elements, notably a (much too light back-up ) leverage ratio, a capital buffer,a proposal to deal with pro-cyclicality through dynamic provisioning based onexpected losses and liquidity and stable funding ratios. However, the paper showsthat Basel risk weighting and the use of internal bank models for determining themleads to systematic regulatory arbitrage that undermines its effectiveness.
OECD Journal: Financial MarketTrends 2014 Volume 2013/2 © OECD 2014 1 Bank business models and the Basel system: Complexity and interconnectedness
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