[Critical Review of Basel III: An Evaluation of New Banking Regulations]

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CHAPTER I: INTRODUCTION

Introduction

In assessing the impact of the implementation of the Basel III agreement on the economic process, one must critically wonder which problem this accord should aim to tackle. Most of the analyses of the preceding accord emphasised the procyclical character of the agreement '. In addition, in the aftermath of the crisis, analysts have raised the issue of the permissive character of the micro-self-regulating principles of the banking industry in the diffusion of systemic risk, as well as a number of other problems", This paper will argue that while the procyclical patterns of the agreement have, in part, been taken into account in the regulatory reforms, the diffusion of systemic risk is not tackled. (Tarullo 2008 100)

The securitisation process is important with respect to capital requirements. Indeed, when the principles of a loan are accepted, banks are requested to hold a certain amount of capital, in case of unfavourable circumstances. This can be avoided through securitisation.

A very simple example is provided in Tymoigne (2009). A plumber wants to invest in a new car for his company. The plumber goes to the bank to get a loan and buys the car from the car dealer. In order to decrease its level of capital requirements and to share risks, the bank will decide to sell the plumber's promise of repayment. But the plumber was able to get a loan only at that bank, and nobody else wants to acquire the plumber's promise. Then the bank implements a Special Purpose Entity, or Special Purpose Vehicle, and sells the plumber's promise to the entity. For doing this, the SPV will borrow funds from individual investors. The promise of the SPV to repay the funds is considered as safe, and then liquid. The SPV has an auto loan as assets and has liabilities called certificate for automobile receivabies (CAR). The bank will collect the monthly debt services from the plumber and transfer them to the SPV for servicing the CAR. (Roubini &Mihm 2010 32)

However, that last scheme is quite simple, and a more detailed analysis would split the proceeds of the different operations presented before between different institutions. Moreover, the asset-backed securities issued by the SPV are backed by a pool of loans, which also allows the SPV to issue different classes of securities given their risks and maturities. Indeed, investors are not interested all in the same products and financial flows. Then Tymoigne (2009), based on Kothari (2006), gives four types of balance ...