Its Central Bank Governor, Mr. Gideon Gono, recently lamented by equating his country’s hyper-inflation to an economic HIV, an epidemic that would kill people on a mass scale. Hence, using inflation to fund budgets is just like getting a demon to work for you. 4  BIS Review 64/2007
Basel III is a complex set of measures that attempts to respond to the regulatory failings that the crisis highlighted. First, many banks found themselves at the start of the crisis with low levels of capital. Second, this same capital had an excessive proportion of hybrid instruments, with a limited or, at least, uncertain loss-absorption capacity. Third, and finally, the procyclicality of Basel II meant there was a trade-off between capital requirements and growth, which could push banks to lessen the risk they assume, with the subsequent adverse impact on credit and the economy. Basel III has increased the minimum level of core capital, the highest-quality capital, to 4.5% from 2% under Basel II. On top of this minimum, Basel III has added a capital conservation buffer of 2.5% and established a connection between banks’ dividend policy and compliance with this minimum capital level. Accordingly, to avoid any interference by the supervisor in their dividend policy, banks must at all times hold a minimum level of top-quality capital of 7%. For the first time, too, Basel III has added a macroprudential component to capital levels. The countercyclical capital buffer could entail an additional capital requirement of up to 2.5%. Building up a capital buffer in good times, with the aim of depleting it in not so prosperous times, is a macroprudential mechanism that will help reduce the contraction of credit when there is a recession, and temper the growth of credit in upturns. However, calibrating the buffer is no easy task.