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David answered on
Dec 26 2021
Running Header: COMMERCIAL BANKING & FINANCE - BASEL III 1
Commercial Banking & Finance - Basel III
Commercial Banking & Finance - Basel III 2
Commercial Banking & Finance - Basel III
Introduction
The global financial crisis of 2007-08 represents one of the major financial crisis leading
to global economic recession. The crisis was marked by and had its origination amongst the
anking sector predominantly in the United States and in Europe. A larger shift in central bank’s
approach and government policies to favour deregulated environment for banks and financial
institutions led to riskier business practices and operations setting the foundations for a major
global crisis. The onset of the crisis in one of the world’s largest economy set a coupling effect
impacting major economies interlinked by globalization leading to economic recession is many
parts of the world including Australia.
The objective of this report is to evaluate and identify the key risks whose
mismanagement was cause for the global financial crisis, the assessment of Basel II framework
to determine the extent to which its includes scope for measurement and management of risks
and finally, an investigation into the balance sheet of Australian commercial banks to determine
the changes and transformation in the assets and liability management in light of the shift in risk
management practices, if so, after the global financial crisis.
Mismanagement of Major Risks Leading to Global Financial Crisis of 2007-08
Amongst the various risks whose mismanagement led to the onset of global financial crisis,
the following represents some of the significant risks,
Commercial Banking & Finance - Basel III 3
I. High Leverage:
One of the primary and most important risks concerned the sharp and widespread
increase of the leverage in households and consequent defaults in the housing loans.
Whilst many of the other crises are largely affiliated to the booms / busts in real estate,
most have centred over excessive lending across commercial real estates and less to
households (Claessens et al, 2014; Poole, 2010). However, collapse within subprime
markets as well as the vicious cycle concerning falling prices of house formed catalyst to
financial crisis across United States. The same triggered same form of declines across
housing markets in various advanced nations like Spain, Ireland, etc. in addition to
certain emerging nations that had faced booms (Claessens et al, 2014; Poole, 2010). By
way of directly involving with numerous homeowners, the crisis became much more
intricate. There were no best or established practices in terms of dealing with larger scale
leverage across households as well as the associated potential moral hazards in future
problems, as well as the issues of distribution and equity (Claessens et al, 2014; Poole,
2010).
II. Illiquidity:
The other risk aspect concerned how the increased levels of leverage resulted and
manifested in various set of agents like households, financial institutions, as well as
markets (Claessens et al, 2014; Poole, 2010). Whilst the build-up with respect to leverage
alone was not novel, the levels to which various classes of the bo
owers dependence
over illiquid form of collateral that were finely priced limited the overall ability of the
system from abso
ing even the smaller shocks. The same resulted in rapid levels of
decline across the collateral values and the same shook the overall market confidence
Commercial Banking & Finance - Basel III 4
(Claessens et al, 2014; Poole, 2010). Fear over the defaults by counterparty across large
financial institutions which had higher levels of leverage as well as capitalized thinly,
lacking funding liquidity as well as having extensive exposures for off-balance sheets
increased in dramatic fashion early over the crisis leading to the freezing in market
transactions as well as making valuations on the underlying assets to be much more
problematic. Systemic vulnerabilities which were slowly building up subsequently turned
the...