From Basel II to Basel III. Would Investment Banking be preferred under Basel II?

Master's Thesis from the year 2013 in the subject Economics - Finance, grade: 1,7, Johannes Gutenberg University Mainz, language: English, abstract: In the year 2007 the first bad signs appeared which predicted that something is happening in

global financial markets. An asset-bubble in the US housing market started to bust and that

event had generated fatal consequences not only for the US, but also for the rest of the world.

Several major peaks characterize the recent financial crisis, also named subprime crisis, such

as the country default of Iceland (though subprime crisis was not the main cause) or the

nationalization of the mortgage corporations Freddie Mac and Fannie Mae by the US

government. Certainly, no one forgets the queues of people waiting outside the branches of

the British bank Northern Rock to withdraw their savings from the bank as a result of rumors

about liquidity problems of this institution. Some of the biggest Investment Banks in the

world experienced serious difficulties with reference to their liquidity situation and were

acquired by other banks. JPMorgan Chase bought the traditional US Investment Bank Bear

Stearns and Bank of America merged with the US Investment Bank Merrill Lynch. Clearly,

one of the most important events in the course of the subprime crisis was the collapse of the

US Investment Bank Lehman Brothers which happened on 15th September 2008.

Especially Investment Banks were hit hard by the subprime crisis and also the Investment

Banking divisions of universal banks caused many issues for the whole institution. One of the

main causes of the subprime crisis was identified: the Investment Banking business. The

regulatory framework with reference to the banking supervisory failed in times of financial

turmoil and needed to be reformed. In particular, the capital situation and liquidity profile of

many banks were not adequate compared to the risks these banks were exposed to. Risks

resulting from positions in the trading book (market-to-market) and risks resulting from offbalance

sheet items which were not monitored by supervisory authorities needed to be

emphasized. When the crisis hit, the capital requirements on the banking book were

sufficiently deep to safeguard banks. The capital requirements on the trading book, however,

were nowhere strong enough to absorb the losses (Dayal, 2011, p. 17). The new regulatory

framework, namely Basel III, developed by the Basel Committee on Banking Supervisions

which was finalized in 2011 focused on these risks.