In the year 2007 the first bad signs appeared which predicted that something is happening in
global financial markets. An asset-bubble in the US housing market started to bust and that
event 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, such
as the country default of Iceland (though subprime crisis was not the main cause) or the
nationalization of the mortgage corporations Freddie Mac and Fannie Mae by the US
government. Certainly, no one forgets the queues of people waiting outside the branches of
the British bank Northern Rock to withdraw their savings from the bank as a result of rumors
about liquidity problems of this institution. Some of the biggest Investment Banks in the
world experienced serious difficulties with reference to their liquidity situation and were
acquired by other banks. JPMorgan Chase bought the traditional US Investment Bank Bear
Stearns 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 the
US Investment Bank Lehman Brothers which happened on 15th September 2008.
Especially Investment Banks were hit hard by the subprime crisis and also the Investment
Banking divisions of universal banks caused many issues for the whole institution. One of the
main causes of the subprime crisis was identified: the Investment Banking business. The
regulatory framework with reference to the banking supervisory failed in times of financial
turmoil and needed to be reformed. In particular, the capital situation and liquidity profile of
many banks were not adequate compared to the risks these banks were exposed to. Risks
resulting from positions in the trading book (market-to-market) and risks resulting from offbalance
sheet items which were not monitored by supervisory authorities needed to be
emphasized. When the crisis hit, the capital requirements on the banking book were
sufficiently 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 regulatory
framework, namely Basel III, developed by the Basel Committee on Banking Supervisions
which was finalized in 2011 focused on these risks.
Inhaltsverzeichnis (Table of Contents)
- I. Introduction
- II. Theoretical background
- II.1. Review of Basel II
- II.1.1. Minimum capital requirements
- II.2. Review of Basel III
- II.2.1. Capital requirements and buffers
- II.2.2. Liquidity and funding
- II.2.3. Risk coverage
- II.3. Research about the impact of capital regulation
- II.1. Review of Basel II
- III. Impact on Investment Banking activities
- III.1. Markets
- III.1.1. Commodities
- III.1.2. Credit
- III.1.3. Equities
- III.1.4. Foreign Exchange
- III.1.5. Rates
- III.1.6. Structured Finance
- III.2. Corporate Finance
- III.2.1. Mergers and Acquisitions
- III.2.2. Equity Capital Markets
- III.2.3. Debt Capital Markets
- III.1. Markets
- IV. Conclusion
Zielsetzung und Themenschwerpunkte (Objectives and Key Themes)
This master thesis aims to analyze the potential effects of Basel III regulations on investment banking activities. The thesis explores the key changes introduced by Basel III, compares them to the previous Basel II framework, and examines their potential impact on various market segments and corporate finance activities.
- Capital Requirements and Buffers
- Liquidity and Funding
- Impact on Investment Banking Activities
- Changes in Market Dynamics
- Potential Shifts in Corporate Finance Strategies
Zusammenfassung der Kapitel (Chapter Summaries)
The thesis begins with an introduction that outlines the context and objectives of the research. Chapter II provides a comprehensive theoretical background, reviewing the key features of Basel II and Basel III, including capital requirements, liquidity provisions, and risk coverage. This chapter also explores existing research on the impact of capital regulation on financial institutions.
Chapter III delves into the potential impact of Basel III on investment banking activities, analyzing its implications for various market segments, including commodities, credit, equities, foreign exchange, rates, and structured finance. It also examines the effects on corporate finance activities such as mergers and acquisitions, equity capital markets, and debt capital markets.
Schlüsselwörter (Keywords)
The key terms and concepts explored in this master thesis include Basel II, Basel III, capital requirements, liquidity, funding, risk coverage, investment banking, markets, corporate finance, mergers and acquisitions, equity capital markets, debt capital markets, and the impact of regulation on financial institutions.
Frequently Asked Questions
What is the difference between Basel II and Basel III?
Basel III was developed in response to the 2008 financial crisis. It introduces stricter capital requirements, new liquidity buffers, and a stronger focus on risk coverage compared to the Basel II framework.
How does Basel III affect Investment Banking?
Basel III increases the cost of capital for high-risk activities typical of investment banking, such as structured finance and trading book positions, potentially making these activities less profitable.
Why was the collapse of Lehman Brothers significant for regulation?
The collapse highlighted that capital requirements on the trading book were insufficient to absorb massive losses, leading to the overhaul of global banking supervisory standards (Basel III).
What are "Liquidity Buffers" in Basel III?
They are requirements for banks to hold enough high-quality liquid assets to survive a significant stress scenario lasting 30 days, preventing the "run on the bank" seen in the 2008 crisis.
Would Investment Banking be preferred under Basel II?
Yes, from a purely profitability and capital-efficiency standpoint, Basel II was more lenient towards investment banking risks, allowing higher leverage than the stricter Basel III rules.
- Quote paper
- Malte Vieth (Author), 2013, From Basel II to Basel III. Would Investment Banking be preferred under Basel II?, Munich, GRIN Verlag, https://www.grin.com/document/271203
