The Challenges of Basel III for the Czech Banking Sector

As the global crisis has shown, a revision of Basel II regulation was needed to reflect the current trends in the world financial markets. New regulatory Basel III proposals may not hit banks in the Czech Republic significantly because these banks report high capital ratios and liquidity buffers already. However, some negative impacts might be expected. In this paper we discuss the Basel III proposal and its expected direct and indirect impacts on the Czech banking sector. The most significant direct impacts encompass newly-introduced liquidity requirements, higher capital requirements for counterparty risk and higher capital requirements for trade finance products. The indirect impacts include lower banks' profitability due to expected lower growth of the Czech economy (resulted from Basel III implementation in Western Europe) and uncertain reaction on regulatory proposals of foreign parent banks that own a vast majority of banks operating in the Czech Republic. We believe that Basel III will fail as both Basel I and II did. Moreover, we expect that this regulation will not prevent financial markets from future crises.