Assessing the impact of Basel III The Basel III framework was developed in response to the issues revealed by the 2008 financial crisis, now Professor Andreas Dietrich together with Professor Gabrielle Wanzenried and other researchers at the Lucerne University of Applied Sciences and Arts aim to assess the impact of these new rules and guidelines on the Swiss banking sector. The crisis of 2008 revealed significant deficiencies in the way the financial sector was regulated as banks across the world experienced severe liquidity problems, to which many governments responded by bailing out major institutions. New rules around liquidity and funding structures have since been agreed in the Basel III regulatory framework, now Professor Andreas Dietrich and his research team aim to assess their impact on Swiss retail banks in a new research project. “Our belief is that these liquidity rules are the ones that really matter for banks. We want to assess the impact of these new liquidity rules on the banks, on their overall profitability and performance. How have they reacted to these new rules and guidelines?” he outlines. Prior to 2008, liquidity rules often weren’t discussed at a strategic level, but the impact of the crisis prompted a major re-think. “After the financial crisis, it was realised that liquidity risk is actually very important,” says Professor Dietrich.
Market liquidity This relates both to a bank’s ability to raise capital from selling assets, and also the extent of its cash reserves. Professor Dietrich and his colleagues are essentially
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addressing two aspects of liquidity in their research. “One is short-term liquidity, which can be thought of as a fairly basic form of liquidity. So if liquidity flows out during a stress scenario, then the banks still need to have enough liquidity to cover short-term demands from customers,” he outlines. Many banks found themselves unable to do this in 2008, as they were over-leveraged and had extended excessive amounts of
example provides mortgages that are funded by deposits over a more extended period. The Basel III framework set out the liquidity coverage ratio (LCR) and the net stable funding ratio (NSFR) to promote more sustainable funding structures. “These funding ratios are the focus of our project,” says Professor Dietrich. These ratios set out the amount a bank should hold in cash and assets in relation to its cash outflows
We want to assess
the impact of these new liquidity rules on the banks, on their overall profitability and performance. How have they reacted to these new rules and guidelines? credit, leaving them badly exposed when the crisis hit. “Liquidity risk can be thought of as the danger that a bank will not be able to fulfill all its liquidity requirements. So people remove money from their accounts, because they are afraid that the bank might not have sufficient liquidity any more,” explains Professor Dietrich. A second part of the project’s research centres on long-term liquidity, which relates to a bank’s ability to maintain liquidity in the long run, where an institution for
under certain scenarios, with the ultimate goal for regulators of helping the market run effectively, while still giving banks scope to lend money and take on risk at an appropriate level. “These two new ratios were included in the Basel framework and as a result I believe the liquidity risk is now lower than it was before the financial crisis,” continues Professor Dietrich. As head of the institute of financial services at Lucerne University of Applied Sciences and Arts in Switzerland, Professor
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