Banking Regulatory reforms Essay Example | Topics and Well Written Essays - 1500 words

Banking Regulatory reforms - Essay Example A few months later, the Franklin National Bank of New York had to shut their operations due to substantial foreign exchange losses. The turmoil in the financial sector prompted the governors of the central banks of G10 countries to decide upon measures on Banking Regulations and Supervisory Practices. Later, this came to be known as the Basel Committee on Banking Supervision with a purpose to extend cooperation among its member countries in the matters related to banking supervision. Initial objectives were to set minimum supervisory standards; exchange information on supervisory practices and improve the techniques of supervision on their banking system. The Central banks of the each member country represent their countries in the committee. It must be noted that the committee's decision has no legal bearing. The committee formulates standards and recommends them to their member countries for its implementation. The committee's sole aim is to have common standards for regulatory and adequacy measures. The 1988 accord among the member countries, with regard to the regulation and supervision of banking sector, continued until 1999 when the Committee decided to further improve the capital adequacy framework. Current Regime under Basel II The revised capital framework came into force in 2004 called Basel II. The Basel II was aimed at creating an international standard for regulators to decide upon how much capital the banks must have to safeguard themselves in the event of any financial crisis. Sufficient consistency of regulations was focused at to ensure that this does not become a reason of competitive inequality for some of them. Their advocates believed that such a regulatory framework is needed to prevent failure of banking system should such crisis emerge in the future (Basel Committee on Banking Supervision, 2013). Basel II, in theory at least, attempted to set up capital and risk management requirements so that banking failures could be avoided. For this, Basel II created disclosure requirements so that all market participants could know about the capital adequacy of a financial institution. They also ensured that market risk, credit risk, and operational risk are articulated based on available data. Basel II focused on minimum capital requirements, market discipline and adequate supervision (Basel Committee on Banking Supervision, 2013). Though Basel II regulatory measures were in force yet it could not prevent 2008 international financial crisis. Post 2008 crisis, the Central banks came out pointing various reasons of financial failures and about the weaknesses that existed in Basel II accord. An urgent need was felt by all concerned to address weaknesses in Basel II. That is why the Basal committee on banking supervision decided to create a new comprehensive accord that could further reform and address the issues that were instrumental in causing the 2008 financial crisis (Basel Committee on Banking Supervision, 2013). It will be interesting to see how Islamic banks, in the context of Basel II manage the capital adequacy and risk exposures. Islamic banks do not use money markets and that is why they are susceptible to liquidity risks. Their inability to borrow for short-term fund needs make them vulnerable to market fallouts. The situation necessitates that Islamic banks must maintain higher liquidity than any conventional banks. Basel