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Basel III’s Capital Adequacy Requirements

Howard, Cory, ‘Under Pressure': Basel III’s Capital Adequacy Requirements Squeeze Broker-Dealer’s Returns on Equity, Increase the Need for the Imposition of Uniform Fiduciary Duties (July 23, 2013). John Marshall Law Journal, Vol. 7, No. 1, Fall 2013, Forthcoming. Available at SSRN

The most recent round of international banking regulations promulgated by the Basel Committee on Banking Supervision, called Basel III, is an attempt to prevent future global recessions by implementing tougher capital requirements on financial institutions. However, these regulations have also been made applicable to broker-dealer operations, and new methods of calculating capital reserves will choke available liquidity, both in-house and on the repo market, which in turn will reduce broker-dealer profitability, as measured by returns on equity (ROE). While this is troublesome for broker-dealer shareholders and bank managers, it is even more troubling for the SEC, FINRA, and the clients of broker-dealers, who will likely have to deal with increased instances of fraud as broker-dealers try intently to achieve pre-Basel III profitability.

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