Improving Banking Supervisory Mechanisms
In the OIC Member Countries
8
2. Recent Global Trends in Banking Regulation and Supervision
In this section, we lay out details of the new regulatory and supervisory framework imposed
by Basel III and its modifications and improvements compared to Basel II.
The latest global financial crisis, which began in 2007 and intensified with the collapse of
Lehman Brothers in 2008, questioned the usefulness of the international architecture
developed to safeguard the stability of the global financial system. Most banks in the US and
Europe lost an enormous amount of their capital, which almost collapsed the banking system.
Figure 1: Major Banks' Market Capitalization
Source: Bloomberg
As shown in Figure 1, major banks' market capitalization is still around 2000 levels. Such a
level of banking crisis led many researchers and regulators to admit that the financial
architecture largely failed.
Some analysts emphasized the weaknesses in policy-making. Others blamed the trend toward
deregulation. Some other researchers stated that the problems with incentives in the financial
markets and the regulatory and supervisory framework caused the recent banking crises.
However, almost all researchers agreed on the fact that there were major shortcomings in the
regulatory and supervisory framework of the banking sector.
These failures were related both to the micro and macro aspects of prudential regulations. For
instance, before the crisis some micro-prudential regulations were poorly designed. The Basel
capital adequacy measures, particularly risk weights, underestimated the riskiness of assets
such as mortgages and sovereign debts. Related to this issue, the different treatment under the
Basel rules of assets held in banking books and those held in trading books, as well as the
definition of capital, caused many problems in banking.
In a nutshell, the main changes in banking regulation proposed by Basel III in comparison to
Basel II are:
0
20
40
60
80
100
120
140
Ara 1999 Eyl 2002 May 2005 Şub 2008 Kas 2010 Ağu 2013
Major Banks Market Cap: KBW Index