International Capital Markets Law and Regulation (Essay Sample)

International Capital Markets Law and Regulation Question 1: The Basel Accords The Basel Accords are the banking regulation and supervision accords that are issued by the Basel Committee on Banking Supervision. Currently, there are three such accords, coming in the order of Basel I, Basel II and Basel III. After the Bretton Woods Institution collapsed, many large and international banks around the world incurred heavy foreign currency losses. Responding to these financial disruptions in the international market, central bank governors of G 10 countries established the Committee on Banking Regulations and Supervisory Practices in 1974. The Committee was later renamed the Basel Committee on Banking Supervision to provide a forum for cooperation among member countries in banking regulation and supervisory matters. In the accords, the committee has published standards for members to implement as resilience in the global banking system and promote confidence in internationally active banks.[Bank for International Settlements, History of the Basel Committee, BIS.org (June 2016) </bcbs/history.htm>] Basel I Before 1990s, the financial soundness of the firm was basically measured by the leverage ratio. However, one cannot clearly ascertain the level of risks in assets, because with the passage of time, risks attached to assets are more likely to increase. When risks against the assets increase, the bank will fail to be financially sound. The Basel I thus focused primarily on credit risks and asset risk-weighting. Banks had to classify their assets into five categories according to their levels of risks. The percentages of risks levels (from 0% to 100%) were to be assigned to debtors abilities regarding debt payment. Financial institutions were required to hold a minimum capital represented by 8% of the weighted risk. For instance, if the bank expected a risk level of 20% on a certain weighted asset, it was required to hold 1.6% of capital amount to represent the risk in the weighted asset. Measurement of risk was performed by the following equation: Risk-based capital ratio=CapitalRisk-adjusted assets Post Basel I analyses indicated that many banking institutions at both international and domestic scope adopted and implemented the recommendations. Banks themselves would go further to employ personnel with superior techniques for the purpose of improving their internal capital economic measures and risk management. In this way, risk measurements and management in the banking industry significantly improved. However, after ten years, the banking industry experienced changes in operation and market environments, despite asset credit risks. The Accord had not considered risks of operational nature. As businesses expanded overseas, merged with others and adopted newer technologies, it became evident that there were substantial risks in their operations. Market risks emanated from the fact that the banking system began experiencing complex innovations in financial instruments. Moreover, although some assets could be assigned same risk weights, their credit qualities could differ in the market.[Ibid.] [Gordon Alexander, Alexandre Baptista and Shu, Yan, ‘A Comparison of the Original and Revised BASEL Market Risk Frameworks for Regulating Bank Capital' (2013) 85(C) Journal of Economic Behaviour & Organisation 249-268.] Basel II After insights into the aforementioned weaknesses in Basel I, the Committee decided to make more changes to make the measure of risk-based capital more risk sensitive. It was thus to deal with all kinds of risks that the banking firm could face: credit risks, operational risks and market risks. Despite the requirement that the firm holds 8% of capital for assets whose credits are risky, the banking firm is also supposed to take into consideration, with same percentage measures, amounts of capital for operational and market risks. Apparently, the Basel II framework is more complex than the Basel I framework. It is performed as:[Bank for International Settlements.] Risk-based capital=CapitalCredit Risk+Market Risk+Operational Risk Different from Basel I accord which applies the same framework of measuring credit risk to all banks, the Basel II framework has provided three options for credit risk measurement. This is also the case with operational risk which has three options for measurement. Supervisors are usually encouraged to elect approaches that go well with the firm's ability to measure risks in credits and operations. Firms that are more exposed to risks are required to adopt options that are more risk sensitive. Large and well-resourced banks are expected to elect advanced risk measurement options. The Basel II framework expanded on its predecessor about how banks are supposed to hold adequate capital against risks. The rules of the framework continue to be adopted by banks in different countries. The framework gave regulators and supervisors more risk sensitive tools for assessing risks in banking industry. Nonetheless, by requiring both on-balance and off-balance sheet assets to be disclosed, the Basel II instilled discipline in the financial market. There have been ongoing debates about whether small and medium banks that do not transact internationally should adopt the Basel II framework in measuring and managing risks. Some banking entities have argued that implementing the Basel II framework is much expensive, reduces competitive equity and does not account well on how operational risks have to be treated. Given that the Global Financial Crisis of 2008 occurred when the Basel II framework was being implemented, experts have argued that the crisis demonstrated that framework was weak.[Gordon Alexander, Alexandre Baptista and Shu, Yan, 249-268.] [John Williamson, ‘Understanding The Basel III International Regulations' (June 2016) <http://sxpekzi.iie.com/publications/pb/pb09-11.pdf.>] [Federal Bank, Federal Reserve Bulletin (Washington, DC: Federal Bank, 2003), 396-405.] Basel III The Basel III banking regulatory framework expanded the Basel II framework by recommending voluntary regulations and supervisions that ensure financial stress testing, capital adequacy and sufficient market liquidity.[Bank for International Settlements.] In this regard, it requires that Common Equity Tier 1 (CET 1)Risk-weighted Assets (RWAs) ≥4.5% as capital requirements; Tier 1 CapitalTotal Exposure ≥3% as leverage ratio, where total exposure amount of all assets exposed to risk; high quality liquid assetsTotal net liquidity outflwos over 30 days ≥100%, as the required liquidity coverage ratio.[Peter King and HeathTarbert, ‘BASEL III, An Overview,' 30(5) Banking and Financial Services Policy Report 1] The Basel III recommendations are being widely adopted in Europe and America, with some countries imposing tougher versions as economic resilience for financial crisis. By avoiding financial stress, maintaining healthier amounts of true equity and having sufficient liquid assets, the firm can meet its financial obligations within 30 days. However, by the fact that the Basel III still considers asset risk weighting by rating institutions, managements can easily collude with raters to attract lenders and investors. Banks such as Citigroup have been brought to knees due to the fact that they were poorly rated at AAA, when they had pools of loan debts that were not risk free.[Gordon Alexander, Alexandre Baptista and Shu, Yan, 249-268.] [Brian Perry, ‘Understanding the Basel III International Regulations' Investopedia (June 2016) </articles/economics/10/understanding-basel-3- regulations.asp#ixzz25isUXmaa>] Question 2: International Monetary Fund International Monetary Fund (IMF) is an international financial organization that works closely with 188 member states to encourage global monetary cooperation, facilitate international trade, secure financial stability, reduce poverty and promote high employment and stable economic growths. IMF and the World Bank are the two global institutions that were formed in 1944 during the Bretton Woods Conference, though the former formally came into existence in 1945. At its formation, the Fund's Articles of Agreement were ratified by 27 countries. Member countries grew to 39 in the year 1946. The Fund began its financial operations in 1947, with France becoming the first country to borrow funds. IMF continued to be one of the key organizations at the international economic scene, aiding members to maximize economic sovereignty, rebuilding and balancing international capitalism and embedding economic liberalism in the world. Its importance and influence on the world scene rose when previously colonized states and those under the USSR joined it. The Bretton Woods institution continued to prevail until 1971 when the convertibility of the US dollar into gold was suspended by the Nixon government. Member countries have been contributing funds to the IMF's financial pool for any member country that experiences difficulties in balance of payment to borrow the money.[John Loxley, 'Reflections on Change and Continuity at the IMF'' (2011) 32(3) Canadian Journal of Development Studies 223-238.] The fund's major activities have involved surveillance of member economies, statistics keeping and analysis and recommendations on particular economic and financial policies. The organization's major objectives still remain promotion of international trade, international monetary cooperation, high employment, sustainable economic growth, exchange-rate stability and availability of production resources to all member countries.[Ibid.] IMF has been in the forefront to help member states in managing domestic capital stability. It has been providing technical assistance regarding cross border capital flows to ensure healthy in...