The global financial crisis, which was witnessed between 2007 and 2008, prompted the establishment of fiscal mechanism to curb the problem in the future (Ondimu 2017, p.21). Subsequently, in 2010, the Basel Committee on Banking standards delivered the Basel III Accords, which highlight the specifics of international regulatory standards on bank liquidity, stress testing, and capital adequacy. The Basel III Frameworks are intended to assist in protection of financial stability and enhance sustainability in economic development (Ramirez 2017, p.11). They also assist to reinforce the risk management, monitoring and regulation of the banking sector. The key goal of the Basel II is to eliminate the capacity of the banks to destroy the economy through accumulating excess risks (King 2013, p.4). Therefore, Basel III requirements are instrumental in dealing with bank failures, shadow banking, small business finance, and finance innovation.
The Basel III requirements are designed in such a way that they encourage financial stability in the financial institutions hence prevent bank failure. Precisely, they use a combination of various regulations likely to assist in generation of a more steady monetary system (Abdullaev 2013, p.52). Banks stability is essential in the economy because they drive the economic activity through delivery of credit and lending. Similarly, any measures deliberated to limit the credit provisions are likely to hamper economic growth. Moreover, it would enable lower the risk for recessions like one witnessed in the past decades (Ramirez 2017, p.13).
The requirements on liquidity and capital assist in protecting the banks from failures. It recommends an increase in the capital quality and creation of liquidity coverage, which would help in reinforcing the bank resiliency (Ondimu 2017, p.29). More importantly, Basel II provides stringent capital requirements as compared to Basel I and II. In this respect, the regulatory capital of the banks is categorized into Tier 1 and 2. Similarly, Tier 1 is further segmented into extra Tier 1 capital and Common equity Tier 1. The difference is essential since security instruments incorporated in Tier 1 capital has the largest phase of subordination (Izzi, Oricchio and Vitale 2011, p.23). Furthermore, Common Equity Tier 1 capital provides equity instruments that have no maturity and discretionally dividends. The Tier 2 capital comprise of unsecured subordinated debt with a unique maturity of more than five years