Basel III norms and flow of funds—a perspective

The Basel III norms have come into force recently to be implemented by all the lending institutions globally and also in our country in a span of five years, with a view to mitigate or insulate these institutions from the risks and shocks from any impending financial crisis. The implementation of these norms by the lending institutions will impact their sources and uses of funds, which will, in turn, affect thetransactions of the real sectors of the economy, albeit with a time lag. The speed of adjustment of the financial institutions to these measures will depend upon their resources and deployment of funds as also the returns thereof. The Basel III accord, norms in respect of which are conceived in the background of global financial crisis in 2008, appear more rigorous than those in the earlier accords. Though it is difficult to make a quantitative assessment of the impact of these measureson the various sectors without adequate data base, the scenario likely to emerge from the existing financial structure may be roughly scanned to visualise the primary impact on the financial sector(in particular commercial banks) and the secondary reaction of the borrowing sectors constraining the financial flows of these sectors, with consequential changes in saving, investment and output. This paper is a preliminary attempt in this direction.

[“Change is difficult for all countries though they all stand to gain in the long term, not just from a stable world economy, but also from a more sustainable domestic growth strategy.”----Raghuram G. Rajan (2010): Fault Lines: How Hidden Fractures Still Threaten the World Economy, Princeton University Press Princeton and Oxford]