Sunday, February 3, 2013

MONEY AND CAPITAL MARKET








Contents







Executive summary

Over the period, the emergence of capital markets has continued to play significant role in the development of global economies leading to the rise in national prosperities. Certainly, the money and capital market has received significant contribution from the participating nations on the international scene. In this regard, various nations have come together to forge trading unions with the view of cementing their companionship. One major attribute that has resulted in the development of the money and capital market is the enhancement of comparative advantage and specialization. The growth of national economies is extremely vital and that can be achieved through enhancement of trade through innovation and invention of new ideas. The continued exchange of goods and services on the world market has led to the emergence of global capital market where all the aspects of financial and capital transactions of the member countries are regarded with an accord of integrity.

However, despite the increase in the participation of the world economies in the global market, the difference in the rate of economic growth and per capita income pose a significant challenge to the equality of the national consideration of individual economies. This led to the establishment of a set of banking rules and regulations. These set of banking standards were named the Basel international banking regulations. Over the years of development, the establishment of the banks has taken significant amount of time and the Basel group international banks has undergone significant transformations since the inception. The transformations are evidenced by the transitions from BASEL 1 to BASEL II and finally BASEL III. In view of these developments, it is evident money and capital is being developed periodically in the global perspective because a huge sum of money is involved in the world market. The establishment of the international has stipulated rules stating that the proceeds for the trade and operation be shared amongst the member countries.

Task 1

The main factors that facilitated movement from Basel II to the Basel III

The adoption of the norms and regulations provided by Basel ii signified an improvement of the previous norms of Basel i. However, historical records have proved that the norms of Basel ii were not adequate for the enhancement of the world economic growth (Bernd Engelmann, 2011 34). This sentiment was echoed by the both the chairman and the finance minister serving as the committee of the international banking federation. In their sentiments, the stated that the banks should establish significant rules that will enable them to be more financially stable to withstand the shocks of the global crunch. Therefore, following the adverse effects of the 2008 credit crisis that adversely affected the economies of the world, the organizing committee of the Basel international banking made a choice to move from the norms of Basel ii to a more advanced policies and considerate Basel iii.

Specifically, the movement was prompted by the regulators realization that the bank should be allowed to hold more deposits to avoid the repeat of another credit crisis. This directive ensured that the banks could hold more deposits which could be valued at 4.5% down from 2% (Chorafas, Economic Capital Allocation With Basel II: Cost, Benefit and Implementation procedure, 2004 102). Another critical aspect that prompted the movement to Basel iii was the view that the norms and practices stipulated in Basel iii presented the bank with more risk proof measures that promised the bank increased earnings. Over the period, the capital market and money regulations experienced a surge because of the increase in participation for the member countries and the general increase in the capacity of the global business. Finally, the development of Basel iii signified development of Basel ii. Therefore, it appeared more powerful and update than its previous version.

Another critical reason for the enactment of Basel iii was the emergence of cut throat competition from other banks. Having realized that the field of capital marketing and money development was becoming profitable, many banks ventured in the field to provide the related services. In this regard, the increase in competition led to a decrease in the earnings derived from the venture. Therefore, it was prudent for the implementation of Basel iii because it was more superior and presented the member countries with higher financial earning opportunities (Chorafas D. N., 2004 71). These earning opportunities were evident in their disclosure stating a significant increase in the rate of capital retention.

The final bit of consideration for the movement from Basel ii to Basel iii was presented with the situation that the quality of supervision was not established in most of the developed markets. These developed markets believed in the expectation of a rational market model. Rational market model is determined by consumers satisfying their undying wants. The period when Basel ii were in operation, the market was characterized by light tough norms that hindered the participation of other nations (Eubanks, 2003 94). In this regard, the profit margin was largely compromised. This attribute was evident during the emergence of the financial crisis in the period of 2008 and the regulators had to act to prevent a repeat of the same situation for occurring again. This called for the abolition of Basel ii and the subsequent adoption of Basel iii.

Task 2

The main feature of Basel iii

After long period of extensive research and development, the regulators of the world financial banks developed the advancement of Basel ii. During this development, some critical aspects taken into consideration included the following; market liquidity risk, stress testing and capital adequacy. These three components were of significant value that the bank decision making committee convened to enact the suggested changes that would ensure change in the formalities of the bank (Francisco F. Vázquez, 2012 46). Following the tribulations of Basel ii, the bank regulators were keen not to allow the repeat of the credit crisis that resulted in global financial crunch. The bank regulators had the option of strengthening the bank to withstand the fluctuations of the dollar as was the case that happened in the early 2000 when the global financial market was hit adversely because of inadequate preparation. Even though both Basel ii and Basel iii were significant in the attainment of financial freedom of the member countries, Basel iii had more pronounced formulas and policies in place.

Capital adequacy

The analysis of the formulation of capital adequacy aspect of individual country’s capital reserve forms one of the ideal reasons leading to the adoption of Basel iii. To begin with, the Basel bank regulatory committee has introduced laws and regulations stating that the member countries must have a stipulated amount of capital deposited with the bank. In a broader perspective, the member countries are all required to deposit a given amount of money as the Federal Reserve with the international bank (Gregoriou, 2009 251). In this regard, the provisions provided under the norms of Basel ii stated that the rates were so low and the Basel bank was susceptible to gradual change and finally breaking down due to insufficient funds. However, the provisions of Basel iii have ensured an increase in the reserve rates with Basel international bank. This aspect has ensured an increment in the stability of the bank because the banks can survive the rising tribulations of the credit crisis.

The aim of enhancing capital adequacy is to protect the banks, firms and industries operating in the economy from the exploitation that may arise due to credit crisis. In this provision, the bank provides the guideline requiring the countries to state how they aim to raise capital for their operations (Jacek G Ral, 2011 29). Also vital is the consideration that the banks must deposit a specific amount with the reserve bank. In order to ensure capital adequacy, the regulators have increased the amount of capital reserve so as to provide more stability during periods of crisis.

Market liquidity risk

Financial analysts have the role of ensuring the market projections are updated to avoid the situation of plunging the economy into crisis. However, the policies adopted may influence the usage of this market liquidity risk (Jacek G Ral, 2011 62). In this regard, the assessment of Basel ii revealed to the analysts that the market liquidity was at risk and many components of the market were not being considers. This led to the formulation of Basel iii that had significant measures of dealing with market liquidity problems.

One of the critical tools used by the regulators during the formulation of Basel iii was the use of credit reserves. The credit reserve limits established by the banks enabled respective economy or firm to liquidate its resources because of the existing amount of float (John Raymond LaBrosse, 2011 103). The interest rate of the Basel international ensures that the member nations are safe guarded against the emergence of credit crisis that may cause liquidation of the assets.  In view of these aspects, the Basel iii is far much better than Basel ii because it offers more returns, stability and protection of its member states.

Task 3

The implications of the banks

Following the introduction of the Basel iii by the Basel bank regulatory authority, the bank experienced significant changes in their formalities and conduction of business. The introduction of this new accord focuses on the introduction of better financial management policies (Maurice Obstfeld, 2005 68). The introduction of Basel iii calls for the joint consideration of the banks to oversee the security of the financial assets. The enactment of the Basel iii encouraged the banks to continue with their investment into the management of the assets and protection of both customers and the stake holders. In this view, it can be stated that the core value of the bank is to safeguard the interest of the stake holders (Powell, 2004 214). The introduction and formulation of these policies led to the creation of better financial assets that could with stand the shocks in the market and establish a lasting solution to prevent the occurrence of the same scenario.

In a broader view, the enactment of Basel iii policies was aimed stimulating growth in the global perspective. Growth in the world market would be realized because the participating countries would increase their Federal Reserve ration and gain more financial stability. In the same note, the members of the international banking community aim to establish resistance to the shock of credit crisis that have adverse effects on the performance of their economies. With this in mind, there is a vital implication to the bank. Because of the perceived increase in growth rate, the banks must be seemingly prepared to handle the increase in the flow of resources. This intelligent growth would be characterized by some economies lending to the banks to spur growth.

Financial reforms

Another critical implication to the bank is the issue of undertaking financial reforms. This is highly significant because it will serve the purpose of restoring shareholder and customer confidence. Over the period, the global financial regime experienced a major setback with the emergence of the financial crisis (Sarra, 2003 94). During this period, the shareholders and the consumers all lost confidence with the services of the bank because the banks were also hit by the adverse credit crunch. Therefore, it is vital that the banks establish significant establishment of a strong personnel to cater for the enhancement of both shareholder and customer confidence. In the view of this consideration, the financial implication represented by the aspect the reconstruction of financial reform. The reconstruction of the bank strategies should include sound financial management and stability enhancement; the risk management practices should be stipulated.

Over the period, money and capital markets have experienced tremendous growth. The need to avert the repeat of the credit crisis has prompted significant research activities to be conducted on the efficiency of the financial agencies and the role financial instructions. In this regard, the changes have prompted various implications on the activities of the international banking fraternity. Some of the implications included the need to hold a joint meeting with the member states of the G7 which forms the strongest financial alliance (Moorad Choudhry, 2008 34). The aim of convening such meeting is to ensure enactment of strong financial policies that will help in the formation of financial freedom. Another aim of forming strong alliance on the financial scene is to avoid the recurrence of the financial crisis because of its adverse effects.

Conclusion

It is notable that the field of global money and capital has significantly grown in the recent past. With the emergence of international trade and the consolidation of global economies, the trading partners of the world have decided to develop a joint banking initiative to cater for their development. This banking initiative has been cited to be the Basel banking regulatory authority. Over the period, this corporation has undergone transition dubbed as the transition from Basel I to Basel ii and subsequently Basel iii. In view of these transformations, Basel iii is regarded with much accord because it is established to ensure increased productivity of the banking sector. The basis of development of Basel iii policies was to develop a strong financial market that was not susceptible to the shocks of the market like the credit crisis. In this regard, Basel iii introduced the concept of increasing the reserve amount and enhancing both shareholder and consumer confidence in the banking sector. Finally, the introduction of Basel iii had significant implications on the performance of the banks because the major global banks and trading partners were forced to convene to discuss the changes in the market. Of importance is the G7 meeting to discuss the changing dimensions of the financial market and the possible control of the financial crisis.










References

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