The Great Financial Crisis (GFC) of 2008 demonstrated that banks have significant leverage in the global economy and could have massive repercussions if they were to collapse. To prevent another...Show moreThe Great Financial Crisis (GFC) of 2008 demonstrated that banks have significant leverage in the global economy and could have massive repercussions if they were to collapse. To prevent another crisis, countries adopted the BASEL III agreement, which has the objective of implementing safeguards in banks and mitigating the possibility of systemic risks. However, a substantial amount of literature has emerged claiming that BASEL III does not enhance the stability of the global economy. Therefore, this research seeks to understand: how BASEL III has mitigated systemic risk? To understand the effectiveness of BASEL III, a Most Similiar System Design research was conducted comparing banks in the European Union and the United States. The banks selected for both areas were placed under severe adverse scenarios (stress tests) to identify if they comply with BASEL's III capital adequacy (total capital and leverage ratios). The research demonstrated that the banks in both areas have increased capital adequacy after implementing BASEL III. Nevertheless, the results show that banks are still exposed to systemic risks due to mismanagement and risk controls. BASEL III only places monetary safeguards; however, this thesis identified that banks mitigate systemic risk by placing strong corporate governance principles. This research showed that to maintain global financial stability and create strong safeguards both banks and regulators need to place safety measures of their own to prevent systemic failures.Show less
