From Basel II to Basel III. Would Investment Banking be preferred under Basel II?
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Master's Thesis from the year 2013 in the subject Economics - Finance, grade: 1,7, Johannes Gutenberg University Mainz, language: English, abstract: In the year 2007 the first bad signs appeared which predicted that something is happening inglobal financial markets. An asset-bubble in the US housing market started to bust and thatevent had generated fatal consequences not only for the US, but also for the rest of the world.Several major peaks characterize the recent financial crisis, also named subprime crisis, suchas the country default of Iceland (though subprime crisis was not the main caus...
Master's Thesis from the year 2013 in the subject Economics - Finance, grade: 1,7, Johannes Gutenberg University Mainz, language: English, abstract: In the year 2007 the first bad signs appeared which predicted that something is happening inglobal financial markets. An asset-bubble in the US housing market started to bust and thatevent had generated fatal consequences not only for the US, but also for the rest of the world.Several major peaks characterize the recent financial crisis, also named subprime crisis, suchas the country default of Iceland (though subprime crisis was not the main cause) or thenationalization of the mortgage corporations Freddie Mac and Fannie Mae by the USgovernment. Certainly, no one forgets the queues of people waiting outside the branches ofthe British bank Northern Rock to withdraw their savings from the bank as a result of rumorsabout liquidity problems of this institution. Some of the biggest Investment Banks in theworld experienced serious difficulties with reference to their liquidity situation and wereacquired by other banks. JPMorgan Chase bought the traditional US Investment Bank BearStearns and Bank of America merged with the US Investment Bank Merrill Lynch. Clearly,one of the most important events in the course of the subprime crisis was the collapse of theUS Investment Bank Lehman Brothers which happened on 15th September 2008.Especially Investment Banks were hit hard by the subprime crisis and also the InvestmentBanking divisions of universal banks caused many issues for the whole institution. One of themain causes of the subprime crisis was identified: the Investment Banking business. Theregulatory framework with reference to the banking supervisory failed in times of financialturmoil and needed to be reformed. In particular, the capital situation and liquidity profile ofmany banks were not adequate compared to the risks these banks were exposed to. Risksresulting from positions in the trading book (market-to-market) and risks resulting from offbalancesheet items which were not monitored by supervisory authorities needed to beemphasized. When the crisis hit, the capital requirements on the banking book weresufficiently deep to safeguard banks. The capital requirements on the trading book, however,were nowhere strong enough to absorb the losses (Dayal, 2011, p. 17). The new regulatoryframework, namely Basel III, developed by the Basel Committee on Banking Supervisionswhich was finalized in 2011 focused on these risks.
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