FIN20013 Banking Operations And Governance

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3. The demand deposit is not considered for regulatory rate available. The depositor at any point of time can withdraw the amount, deposited as demand deposits, i.e., savings account, ATM etc. Moreover, though many banks use to provide NOW accounts, where interest on demand deposit can be paid, it has been observed that the interest rate of demand deposit does not change frequently. Hence, it is not treated as sensitive like other bank instruments. Therefore, decrease in demand deposit would not affect the bank’s overall asset-liability (Makkar and Singh 2013).

However, if the clients withdraw the demand deposits due to fall in market interest rates, then, the banks may have to use the fund sources with higher costs (Tanwar 2013).

4. As per Basle III requirement, the liquidity position of any bank can be measured through its Liquidity Coverage Ratio. The Liquidity Coverage Ratio of Dragon Slayer Bank is computed below:

As per the above calculation, the LCR of the bank is 139%. Hence, it can be stated that as the LCR is above 100%, the bank have liquid capital to cushion any unexpected losses (Robertson 2014).

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 7.

The main objective of introducing Basel III accord is to improve the efficiency level of banking sector in handling the economical and financial pressure. This accord also aims to develop more transparent banking activities and effective risk management system (Lin et al. 2013).

Each of the Basel accords are based three distinguished pillars. These pillars are used to describe the primary goal of the accord as well as help to set the guidelines for the banking sector. The three pillars of Basel III are remained unchanged from Basel II. However the main differences between Basel II and Basel III are discussed below:

Better capital quality can be defined as the capacity of absorbing higher losses. Basel III has given more focus on maintaining better capital quality to strengthen the banks’ position during the stress periods.

As per Basel III, the banks have to maintain a cushion, which can be useful for absorbing the economical and financial losses during the stress period.

The countercyclical buffer, introduced in Basel III, will be beneficial to change the capital requirements as per the economic and financial condition of the market (Hans 2015).

The financial crisis in 2008 has led the Basel committee to introduce leverage ratio, which can be used as safety net in any financial crisis period.

For better liquid asset management, Basel committee has incorporated Liquidity Coverage Ratio and Net Stable Funding Ratio in Basel III (Wood 2014).

Apart from the new set of requirements, some of the capital requirements for Basel II are also been amended in Basel III. Those amendments are listed below:

Now the banking institutions have to fulfill some additional requirements according to the guidelines of Basel III. These new requirements are discussed below:

• The banks have to maintain an additional capital conservation buffer of 2.5%.
• The aforementioned countercyclical buffer has to be maintained within a range of 0% to 2.5%.
• The leverage ratio of Tier I assets and liabilities should be 3%.
• The minimum liquidity coverage ratio of the highly-liquid high quality assets must be above 100% (Krug et al. 2015). 

Angelini, P., Clerc, L., Cúrdia, V., Gambacorta, L., Gerali, A., Locarno, A., Motto, R., Roeger, W., Van den Heuvel, S. and Vl?ek, J., 2015. Basel III: Long?term Impact on Economic Performance and Fluctuations. The Manchester School, 83(2), pp.217-251

BA?ARIR, Ç. and Toraman, C., 2014. Financial Stability Analysis in Banking Sector: A Stress Test Method. Journal of Accounting & Finance, (62)

Bhat, G. and Ryan, S.G., 2015. The impact of risk modeling on the market perception of banks’ estimated fair value gains and losses for financial instruments. Accounting, Organizations and Society, 46, pp.81-95.

Hans, M.K., 2015. BASEL III AND ITS IMPLEMENTATION. Journal Impact Factor, 6(5), pp.18-24

Krug, S., Lengnick, M. and Wohltmann, H.W., 2015. The impact of Basel III on financial (in) stability: an agent-based credit network approach. Quantitative Finance, 15(12), pp.1917-1932.

Lin, Y.U.A.N., Xin-yi, Y.U. and Xu, T.O.N.G., 2013. The Basel ? Accord and Risk Management of Financial Companies. Journal of Beijing Technology and Business University (Social Science), 3, p.014.

Makkar, A. and Singh, S., 2013. Interest Rate Risk of Selected Indian Commercial Banks: An Application of GAP Analysis Model. IUP Journal of Bank Management, 12(4), p.58

Robertson, P.R., 2014. Commercial Bank Risk Management and Financial Performance: Case Study. International Research Journal of Applied Finance, 3.

Tanwar, R., 2013. ASSET LIABILTY MANAGEMENT

Wood, C., 2014. Potential downside effects of Basel III: lessons from previous Accords (Doctoral dissertation)

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