The Implementation of Basel III in an Australian Bank: Some Corporate Governance Implications

The uncertainty in financial markets due to the global financial crisis highlights the\ud importance of proper prudential and regulatory practices in commercial banks, and the\ud economic and social costs that can be incurred if risk is not adequately identified and\ud managed. To manage risk, the global community is adopting the third generation of\ud liquidity and capital requirements developed by the Basel Committee on Banking (the\ud Basel III standards). There is no published study focusing on the implementation of\ud Basel III in the Australian banking system. To fill this gap, this study develops a bank\ud asset and liability management model using goal programming for one large Australian\ud bank, to examine the implications of a progressive move to Basel III on key financial\ud variables – net interest income (NII), return on equity (ROE) and return on assets\ud (ROA) – to undertake a preliminary stress testing analysis of the bank after Basel III\ud and to consider some of the governance and policy response issues involved. The\ud `modelling is used to investigate the impact of progressively moving to Basel III from a\ud Basel II base case, assuming that the bank maintains current balance sheet trends,\ud practices and corporate governance settings out to 2019.\ud The bank asset and liability goal programming model was also used to examine the\ud implications of two stress scenarios: the first involves an increase of 5% in net cash\ud outflow (NCO) and a decrease in interest income of 5%, and the second involves an\ud increase of 10% in net cash outflow and a decrease in interest income of 10%. Finally,\ud this thesis examines possible policy responses available to the banks, guided by\ud corporate governance, to offset some of the effects of implementing the Basel III\ud requirements