226ECN Economics for Banking and Finance

Basel III regulations are designed regulatory frameworks to strengthen financial institutions by setting guidelines relating to leverage ratios, liquidity, and capital requirements. The regulations give investors in the banking industry confidence that banks will never repeat mistakes that contributed to the 2007-2008 financial crisis. Therefore, Basel III was developed to serve as a voluntary effort, and it was concluded with feedback and input from financial regulators and banks (Hossain and Islam, 2017, P.45). Many countries have since then integrated the different aspects of Basel III rules to regulate their banking sector. One of the main lessons learned from 2007-2008 is that financial institutions with high leverage ratios have to be adequately controlled instead of automated. The regulation and profitability of United Oversea bank are also impacted by the Basel III changes in various ways.

The new capital requirement under Basel III has impacted the United Oversea bank in different ways. United Overseas bank has to adhere to the Basel III capital requirements since it was introduced and has led to a decrease in profitability due to fewer loans being issued then (Hossain and Islam, 2017, P.45). United Overseas Bank is increasing its lending to pass the cost to their clients. This is because if the bank has a higher level of equity and capital, which is a cost factor, it will increase interest rates for their clients, which further makes the cost of credit increase. This requires the United Oversea bank to retain superior levels of liquid assets.

Basel III accord has slowed the economic growth of United Oversea bank due to increased credit costs and reduced availability. Basel III's consequence was that it led to larger banks shrinking by 3 percent in their profitability (Fidrmuc and Lind, 2020, P.107). Due to the introduction of liquidity requirements in Basel III, the United Overseas' liquidity coverage Ratio and its net stable funding ratio will immensely impact the operation of the bond market. To meet the liquidity coverage ratio asset standards, United Oversea bank has been reluctant to acquire the high overflow assets such as structured investment vehicles and special purpose vehicles.  

Another impact of Basel III is that the demand for secularized possessions and low-quality corporate bonds will reduce since Liquidity Corporate Ratio is biased when it comes to the bank owning and holding covered bonds and government bonds (Akkizidi and Kalyvas, 2018). This has made United Oversea bank increase its liquid assets and raise the proportion of its long-term debt. The banks do this to reduce the maturity discrepancy and maintain the minimum level of Net Stable Funding Ratio as possible. United Oversea bank has also reduced its business operations at a higher chance of liquidity-related risk.

Basel III has also impacted the United Overseas bank's derivative markets as many brokers exiting the derivative market due to higher costs. The Basel III regulation on capital requirements focuses on minimizing counterparty risk, which then vary according to where the bank trades (Akkizidi and Kalyvas, 2018). The bank can trade in a central clearing counterparty or through a dealer. When United Oversea enters into a derivative trade with any dealer, the Basel III regulatory requires the bank to charge high capital for that trade. However, derivative trade trough clearing counterparty has a 2 % making more profitable to United Oversea bank.

Reference List

Akkizidis, I. and Kalyvas, L., 2018. Final basel III modelling: Implementation, impact and implications. Springer.

Fidrmuc, J. and Lind, R., 2020. Macroeconomic impact of Basel III: Evidence from a meta-analysis. Journal of Banking & Finance, 112, p.105-359.

Hossain, S.A. and Islam, K.A., 2017. Impact of Basel II & III Implementation to Mitigate Bank Risk: A Study on Al-Arafah Islami Bank Limited. Indian Journal of Finance and Banking, 1(2), pp.42-51.

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