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

Table of Contents

I. Introduction

II. Theoretical background

II.1. Review of Basel II

II.1.1. Minimum capital requirements

II.2. Review of Basel III

II.2.1. Capital requirements and buffers

II.2.2. Liquidity and funding

II.2.3. Risk coverage

II.3. Research about the impact of capital regulation

III. Impact on Investment Banking activities

III.1. Markets

III.1.1. Commodities

III.1.2. Credit

III.1.3. Equities

III.1.4. Foreign Exchange

III.1.5. Rates

III.1.6. Structured Finance

III.2. Corporate Finance

III.2.1. Mergers and Acquisitions

III.2.2. Equity Capital Markets

III.2.3. Debt Capital Markets

IV. Conclusion

Research Objectives & Topics

This thesis investigates the impact of the Basel III regulatory framework on investment banking activities, aiming to determine whether investment banking would have been preferred under Basel II. It assesses how new capital, liquidity, and funding requirements alter the business models of financial institutions.

• Theoretical evaluation of Basel II and Basel III regulations.
• Economic impact of capital requirements on market activities (FICC and Equities).
• Analysis of corporate finance advisory services under new constraints.
• Transformation of investment banking business models and market consolidation.

Excerpt from the Book

Summary of Chapters

I. Introduction: Outlines the background of the subprime crisis and the necessity for regulatory reform, introducing the research question regarding Basel III's impact on investment banking.

II. Theoretical background: Provides a comprehensive review of Basel II and Basel III, detailing capital definitions, buffers, liquidity ratios, and previous research findings on capital regulation.

III. Impact on Investment Banking activities: Examines specific effects of Basel III on market activities (commodities, credit, equities, FX, rates, structured finance) and corporate finance activities (M&A, ECM, DCM).

IV. Conclusion: Summarizes the transformation of banking business models, noting a shift away from traditional wholesale banking toward specialized, high-scale investment activities.

Keywords

Basel III, Investment Banking, Regulatory Capital, Liquidity Coverage Ratio, Net Stable Funding Ratio, Capital Requirements, Credit Risk, Market Risk, Counterparty Credit Risk, Corporate Finance, Derivatives, Financial Regulation, Shadow Banking, Risk-Weighted Assets, Asset Liquidation

Frequently Asked Questions

What is the core focus of this thesis?

The work examines how the Basel III regulatory framework affects various investment banking divisions and whether the previous Basel II regime offered more favorable conditions for these activities.

What are the primary thematic areas?

The study centers on market activities—including commodities, credit, equities, foreign exchange, rates, and structured finance—and corporate finance services like M&A and capital markets.

What is the main research question?

The primary goal is to evaluate if investment banking would be preferred under the old Basel II accord compared to the newly implemented Basel III standards.

Which scientific methodology is applied?

The research relies on a theoretical and comparative review of Basel frameworks, supplemented by analysis of economic research on capital regulation and industry data regarding revenue splits and market share.

What is covered in the main body?

The main body breaks down the regulatory impact by asset class and business line, analyzing how capital charges, liquidity ratios, and funding requirements incentivize specific banking behaviors.

Which keywords best characterize this work?

Key terms include Basel III, investment banking, regulatory capital, liquidity ratios (LCR/NSFR), and risk-weighted assets.

How does the NSFR specifically impact the structured finance business?

Because structured finance solutions are often long-dated, they increase the required stable funding under the NSFR, making them significantly more expensive for banks to hold on their balance sheets.

What is the conclusion regarding Tier 1 versus smaller banks?

The author concludes that larger Tier 1 banks possess the scale to absorb the high costs of IT and risk system investments, likely leading to further industry consolidation under Basel III.