The impact of Basel III on systemic risk and counterparty risk
Basel III represents progress over its two predecessors, but more work needs to be done in the areas of counterparty risk and systemic risk.
One of the key shortcomings of the first two Basel Accords was that they approached the solvency of each institution independently. The recent financial crisis highlighted the additional systemic risk that the failure of one large institution could cause the failure of one or more of its counterparties, which could then trigger a chain reaction.
Basel III addresses this issue in two ways: firstly by significantly increasing capital buffers for risks related to the interconnectedness of the major
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