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In the past few years, the financial sector has
become the first target. The financial institu-
tions were accused of irresponsible risks, such
as overleverage
5
and short-term planning.
1
In 2008, the crisis caused various financial
institutions to gasp for breath in financial
terms. They had to make up for the declin-
ing value of their assets (loans, shares, corpo-
rate bonds, debt claims on the interbanking
market)
6
2
from the equity. Subsequently they
were forced to increase this equity. In the fro-
zen markets during the financial crisis this
was only possible with financial support from
the government.
Capital requirements: Basel III
Due to the crisis, the regulatory framework
also became a target. The Basel II legislation
that had to guarantee the soundness of the
financial system appeared to have worked in-
sufficiently during the crisis: various institu-
5.
Leverage reflects the proportion between the equity of a financial
institution and its balance sheet total. An institution that is
overleveraged has therefore too little capital in proportion to its
total balance sheet.
6.
Loans, shares, corporate bonds, debt claims on the interbank
market.
tions that fulfilled all the rules perfectly also
lost their balance when the crisis gained speed.
The Bank for International Settlements in
Basel (BIS), where the governors of the cen-
tral banks discuss the stability of the financial
system at fixed times, quickly came with pro-
posals to tighten the regulatory framework in
order to increase the stability of the balance
sheets of the financial institutions. The Basel
III legislation, which will be implemented in
various phases between 2013 and 2018, must
reduce the leverage on the equity of financial
institutions and reinforce their funding. This
should reinforce their balance sheets both
quantitatively and qualitatively.
In European law, the Basel III legislation is
converted into European law via the so-called
CRD IV package. This will apply to all lending
institutions and investment firms throughout
the European Union.
Although the financial sector advocates the
Basel III legislation, it will be a challenge to
continue to reconcile the capital rules with the
growing (social) demand for long-term loans,
for example to fund large projects such as the
construction of hospitals. Definitely when the
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Risk management
“
Stricter capital rules are
the cornerstone of a more stable
banking system.”
Ivan Van De Cloot, Itinera, September 2012