Basel 2.5, Basel III, and Dodd–Frank

It was perhaps unfortunate for Basel II that its implementation date coincided, at least approximately, with the start of the worst crisis that financial markets had experienced since the 1930s. Some commentators have blamed Basel II for the crisis. They point out that it was a move toward self-regulation where banks, when calculating regulatory capital, had the freedom to use their own estimates of model inputs such as PD, LGD, and EAD. In fact, as explained in Chapter 6, the seeds of the crisis were sown well before Basel II was implemented.1

This chapter starts by discussing what has become known as Basel 2.5. This is a collection of changes to the calculation of market risk capital that was put in place by the Basel Committee on Banking Supervision following the large losses experienced by banks during the crisis. The implementation date for Basel 2.5 was December 31, 2011.

The chapter then moves on to consider Basel III, which was a major overhaul of bank regulations, published by the Basel Committee in December 2010. Basel III includes a series of rules concerned with increasing the amount of capital that banks have to keep for credit risk and tightening the definition of capital. An important new feature of Basel III is the specification of liquidity requirements that must be met by banks. Basel III is being phased in over a long period of time ending on December 31, 2019.

The chapter also discusses the Dodd–Frank Act which ...

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