Following the 2008 financial crisis and it consequences, a number of financial regulation has been changed in an attempt to prevent another financial crisis from taking place in future. Some of the most notable financial regulation changes are related to Basel III and they include changes on bankâs capital requirements, liquidity requirement and leveraging requirement. This financial regulation changes will impacts different sectors of the economy in various ways. This paper focus on the potential impact the financial regulation changes will have on the real estate.
2.0 Recent changes in financial regulation
In the wake of the world most devastating financial crisis, many governments across the world responded by introducing tougher change to the financial regulation. The European countries are not exception on this. They also made some significant and notable changes to the financial regulations with the aim of prevent future crisis. In UK and other European countries, the Basel II accord was adopted in response to the financial crisis that occurred in 2008. The Basel II contain a set of financial regulation framework that is based on three pillars. 1) Minimum capital requirement regulation, 2) supervisory review and 3) market discipline. However, the Basel II has since then be replaced by a new set of financial regulation commonly known as Basel III. Basel III has introduced a number of financial regulation requirement including minimum capital requirement, liquidity reform and leveraging ratio (Church, 2016, IBM 2019).
2.1 Minimum capital requirement
One of the financial regulatory requirement introduced by Basel III is the minimum capital requirement. The Basel III requires banks reserve a minimum adequacy capital of 8 percent of it risks-weighted assets. Out of the 8 percent of minimum capital adequacy, 4.5 percent of capital should be in form of common equity, which is an increase from 2.5 percent as previously required. In addition to this, banks will also be required to reserve additional capital namely, conservation buffer at a rate of 2.5% and must be met by common equity. Banks will also be required to reserve additional capital named countercyclical buffer within a range of 0-2.5% of common equity
2.2 Leveraging ratio