BASEL III REGULATIONS ON STRENGTHENING THE BANKING SYSTEM CAPITALIZATION

The objective of future Basel III regulations is to improve the capacity of the banking sector to absorb economic and financial shocks, from whatever source, while reducing the risk of contagion in the financial sector to the real economy. One of the main reasons that the economic and financial crisis began in 2007 has become so severe was the fact that the banking sector in many countries increased by excessive debt. This was accompanied by a gradual erosion of the level and quality of capital base. At the same time, many banks did not have sufficient liquidity reserves. The banking system therefore was not able to absorb systemic losses from trading and lending. Neuralgic points of the banking sector were rapidly transmitted to the rest of the financial system and real economy, resulting in a massive contraction of liquidity and credit availability. Finally, the public sector had to intervene with bailouts, with a massive infusion of capital and guarantees, by exposing taxpayers to huge losses in the financial system.