ABSTRACT

Major regulatory initiatives after the 2007 banking crisis aim to make banks safer for depositors and taxpayers by introducing measures to de-risk and re-capitalize banks. The Basel III framework amended the pre-crisis Basel II risk algorithm for capital adequacy and increased the required amount of loss absorbing capital for banks. Basel III also includes a de-risking element in the form of liquidity management for safer funding. National regulatory initiatives aim both to de-risk banks by measures that separate risky investment banking from the utility retail banking and to re-capitalize them by strengthening the Basel III capital requirements. To achieve the latter objective the Liikanen Review in the EU proposed higher risk weights for bank assets than Basel III, the Vickers Report in the UK proposed higher minimum capital required than Basel III and the Dodd-Frank Act in the US empowered the newly created Financial Stability Oversight Council to impose a tougher leverage ratio than Basel III on banks that are deemed to pose systemic risk. Although all these three structural reform initiatives have not been implemented in full for various specific reasons in these three jurisdictions, the driving principles of these reform initiatives – de-risking banks through de-leveraging/re-capitalizing and reducing reliance on wholesale funds – remain intact despite various types of resistance to these reforms.