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The Basel II Solution to Sub-Prime and Related Financial Planning (Part 1)

1 February 2008 - Markets - Editor

The cataclysmic effects of the sub-prime crisis of 2007 need not have happened at all. Since the retirement financial planning of large numbers of families is at stake, and since so many stocks of the financial sector have been disastrously affected, the Basel norms that US banks have declined to implement for years, needs a detailed and public review. Ask groups of people whose financial planning and stock portfolios have been buffeted by the sub-prime crisis, if they are aware of the safeguards provided by the Basel norms. Ask your banker if his or her employer is Basel II compliant. You will quickly discover that banks and regulators have taken unconscionable risks with your money.

The Basel norms have been fixed by professionals from all over the world. Basel is a key financial center in Switzerland, and hosted the meetings which resulted in norms for the banking industry. The regulations are updated periodically. Basel III will shortly follow Basel I and Basel II. The Basel norms address two vital aspects of financial planning: risk management and supervision. The norms guide banks on the operational and credit risks of their business, stipulate how much capital they should set aside for contingencies, and offer systems of checks and controls to ensure that implementation is uniform. Some countries have implemented Basel norms swiftly, while others have prevaricated on the matter. The United States has one of the worst records of implementing the Basel norms.

What Kind of Regulation Does Your Financial Planning Deserve?

You can apply the Basel norms for your personal financial planning. A first step would be to work on your credit history, and to improve your rating steadily. Every recorded transaction influences credit rating, no matter how small it may be. Therefore, you could stand to gain by transferring routine and recurring cash expenses to your credit card. Naturally, this would work only if you are extremely careful about retiring credit card dues on the dot. Make and stick to budgets that enable you to live within your means: that dream home of your own can wait!

The unexpected does happen to all of us. The Basel norms on risk management are very relevant for personal financial planning. Avoid loans in excess of your professionally assessed worth. Make sure that you can balloon out of an emergency loan at a high rate of interest, through an affordable refinance package, and put such recovery actions in to motion as soon as your emergency is under control. Always consider the stability of your revenue flows when you consider discretionary loans. Distinguish between operational and credit risks, and provide separate contingencies for each category.

How Bank Executives Play Games With Your Retirement Financial Planning

Finance and Marketing have not been traditional bed fellows of Business Management. Banks discovered the joys of consumer and retail operations some years ago. It was soon evident that people, who were not trained in financial matters, could be persuaded to increase a bank’s business at their costs. Credit cards, which started out as means for executives to reduce cash handling while on travel or at business occasions, became weapons of individual subjugation through unmanageable debts. Unfortunately, telephone marketing arrived on the market scene at the same time as the spurt in retail banking development, and innumerable people were stampeded in to impulsive commitments that they could not keep.

The Basel II Solution to Sub-Prime and Related Financial Planning (Part 2)


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