Basel III was reached in September 2010 at the Basel Bank Supervisory Commission, where its secretariat is located in Basel, Switzerland, where the central bank governors and financial supervisory boards from 27 countries gathered to agree on the addition of banking regulations. Basel III was the 'third Basel agreement' after Basel I in 1988 and Basel II in 2004, and the financial crisis that began in 2007. The Basel agreement itself is not compulsory because the Basel Bank Supervisory Commission started as a forum for discussions between countries on matters related to banking supervision, not as an organization based on official treaties. However, as trust in financial institutions becomes more important amid globalization and the level of financial supervision to ensure it needs to be similarly increased, the Basel agreement is more than an agreement that is expected to be legislated not only in member states but also in other countries.
From Basel I to III, the main content is that the bank will have sufficient capital (capital adequacy). Why is the focus on capital? For a company, capital is the subtraction of liabilities (the part borrowed from others) from the company's assets. In other words, from the perspective of the company's owner, capital is purely my share of the company's assets.
However, if you look backward, from the perspective of the owner, if capital is limited, the more debt you raise, the more assets you can grow. Banks make money by mobilizing as much debt as possible to raise assets. This is because the bank's main job is to borrow money from a large number of depositors and lend it to individuals or companies as their assets. Therefore, the bank's main interest is the difference between the interest paid to the depositor and the interest received by the lender.
The larger the assets, the larger the profit base, and since most of them are raised through a debt called deposits, the less capital "my money" goes into the debt, the greater the return profit is relatively for the bank owner. The problem is that if you make money with other people's money like this, you are likely to pursue a more dangerous but profitable business than if you only spend "my money." For this reason, Basel I requires that the proportion of capital in assets be consistently above a certain level so that banks' risk-seeking behavior is restricted and, in case of emergency, a safe device for depositors' withdrawal requests.
Basel III, in particular, requires banks to increase the 'quality of capital'. These include increasing the proportion of common stocks, which can be the real owner of capital. In addition, it is said that banks are trying to expand their eligible capital by reducing the scope of securities that can be recognized as capital. It will be inevitable to follow the international regulatory trend. However, we only hope that 'governance' other than inevitable regulations will be reduced.
