Is Basel III Sufficient in Preventing Another Financial Crisis?

sep. 12, 2024

Basel III, developed after the 2008 financial crisis, aims to strengthen bank regulation with stricter capital requirements, higher liquidity reserves, and leverage ratios to help banks absorb shocks and prevent collapse. However, are there still gaps, particularly regarding risks posed by non-banks?

Basel III is a global regulatory framework developed by the Basel Committee on Banking Supervision in response to the 2008 financial crisis. Its goal is to strengthen the regulation, supervision, and risk management of banks, and introduces stricter capital requirements, mandates higher liquidity reserves, and establishes leverage ratios to ensure banks can absorb financial shocks and avoid systemic collapse.

Viral Acharya, C.V. Starr Professor of Economics at NYU-Stern and former Deputy Governor of the Reserve Bank of India, delves into Basel III’s relevance and its impact on global banking. He discusses the challenges banks face in meeting new capital requirements, as well as the effects on lending, risk management, and competition. Acharya also highlights key gaps in the framework, questioning its effectiveness in preventing future crises.

In this interview, he discusses:

• Basel III’s implications for banks and the broader banking sector.
• The challenges banks face in meeting new capital requirements and potential strategies for compliance.
• The impact on the competitive landscape between large and small banks, as well as between regulated banks and non-bank financial institutions.
• The effectiveness of Basel III measures in preventing financial crises compared to previous frameworks, along with any remaining gaps.
• The risks posed by non-banks and how they fit into the regulatory framework.