Introduction to 'Basel III and Beyond'

By Francesco Cannata; Mario Quagliariello

This article was first published as a chapter in Basel III and Beyond on July 27, 2011, by Risk Books.

“My voice may sound to you harsh, and I may too severely insist on proclaiming the necessity of virtue and sacrifice; but I know, and you too – untainted by false doctrine, and unspoiled by wealth – will soon know also, that the sole origin of every Right is in a Duty fulfilled.”

Giuseppe Mazzini (1860)

The financial crisis erupted in 2007 in the US subprime mortgage market – a relatively small business segment of the global financial system – galvanised into existence an unprecedented period of financial instability in the international markets and the most severe economic recession since the Great Depression of the 1930s. After much debate, a consensus regarding the origins of the crisis has emerged. The list of factors is long, ranging from long-lasting macroeconomic imbalances to microeconomic failures.

Financial regulation, or the lack thereof, must also take responsibility. Prudential and accounting rules did not adequately mitigate excessive risk-taking. In some cases, they in fact provided bankers with wrong incentive structures