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.
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
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
IV. Conclusion
Research Objectives & Topics
This thesis investigates the impact of the Basel III regulatory framework on investment banking activities, aiming to determine whether investment banking would have been preferred under Basel II. It assesses how new capital, liquidity, and funding requirements alter the business models of financial institutions.
- Theoretical evaluation of Basel II and Basel III regulations.
- Economic impact of capital requirements on market activities (FICC and Equities).
- Analysis of corporate finance advisory services under new constraints.
- Transformation of investment banking business models and market consolidation.
Excerpt from the Book
III.1.1. Commodities
Compared to other asset classes the commodities business is a special one as the respective underlying e.g. crude oil, copper or gold can be used for production purposes while the other asset classes are solely traded on financial markets. Thus, commodities can be traded physically as well as financially. For instance, at the harbor in Rotterdam crude oil is physically traded between an oil producer and oil consumer, while oil is financially traded when a corporate client hedges his business against price movements of crude oil. This paper only focuses on the commodities business traded on financial markets and neglects possible impacts of financial regulation on physical markets at all.
Mostly, commodities are traded in the form of standardized future contracts with specific characteristics concerning quality, delivery and maturity of the underlying. These future contracts are traded on exchanges such as the Chicago Board of Trade. Predominantly, banks have two types of clients which have a natural interest to trade commodities. Corporate clients trade commodities in order to hedge the exposure (risk) a client is exposed to. For instance, airline companies are exposed to price risk of kerosene as they need this commodity for their original transportation business and have a natural interest to hedge against this price risk. Typically, a commodity hedge of a corporate client does not have a long maturity as it is difficult for a corporate client to estimate the actual needed quantity he wants to hedge for a long period in advance.
Summary of Chapters
I. Introduction: Outlines the background of the subprime crisis and the necessity for regulatory reform, introducing the research question regarding Basel III's impact on investment banking.
II. Theoretical background: Provides a comprehensive review of Basel II and Basel III, detailing capital definitions, buffers, liquidity ratios, and previous research findings on capital regulation.
III. Impact on Investment Banking activities: Examines specific effects of Basel III on market activities (commodities, credit, equities, FX, rates, structured finance) and corporate finance activities (M&A, ECM, DCM).
IV. Conclusion: Summarizes the transformation of banking business models, noting a shift away from traditional wholesale banking toward specialized, high-scale investment activities.
Keywords
Basel III, Investment Banking, Regulatory Capital, Liquidity Coverage Ratio, Net Stable Funding Ratio, Capital Requirements, Credit Risk, Market Risk, Counterparty Credit Risk, Corporate Finance, Derivatives, Financial Regulation, Shadow Banking, Risk-Weighted Assets, Asset Liquidation
Frequently Asked Questions
What is the core focus of this thesis?
The work examines how the Basel III regulatory framework affects various investment banking divisions and whether the previous Basel II regime offered more favorable conditions for these activities.
What are the primary thematic areas?
The study centers on market activities—including commodities, credit, equities, foreign exchange, rates, and structured finance—and corporate finance services like M&A and capital markets.
What is the main research question?
The primary goal is to evaluate if investment banking would be preferred under the old Basel II accord compared to the newly implemented Basel III standards.
Which scientific methodology is applied?
The research relies on a theoretical and comparative review of Basel frameworks, supplemented by analysis of economic research on capital regulation and industry data regarding revenue splits and market share.
What is covered in the main body?
The main body breaks down the regulatory impact by asset class and business line, analyzing how capital charges, liquidity ratios, and funding requirements incentivize specific banking behaviors.
Which keywords best characterize this work?
Key terms include Basel III, investment banking, regulatory capital, liquidity ratios (LCR/NSFR), and risk-weighted assets.
How does the NSFR specifically impact the structured finance business?
Because structured finance solutions are often long-dated, they increase the required stable funding under the NSFR, making them significantly more expensive for banks to hold on their balance sheets.
What is the conclusion regarding Tier 1 versus smaller banks?
The author concludes that larger Tier 1 banks possess the scale to absorb the high costs of IT and risk system investments, likely leading to further industry consolidation under Basel III.
- Citation du texte
- Malte Vieth (Auteur), 2013, From Basel II to Basel III. Would Investment Banking be preferred under Basel II?, Munich, GRIN Verlag, https://www.grin.com/document/271203
