Basel III

What is Basel III?

Basel III is a global regulatory framework for banks. It is a set of financial reforms developed by the Basel Committee on Banking Supervision. The main objective is to strengthen regulations, supervision and risk management within the banking Industry.

In 2008, a global financial crisis on banks led to the introduction of Basel III. This could improve a Bank’s ability to Handle any shock from Financial Stress. Strengthening transparency and disclosure was important.

Basel III is the third part of the Basel record and is a continuous process to help the banks to take risks. However, the risks should not be more than they can handle.

Since Basel III, the Basel Committee on Banking Supervision has expanded membership. Now 45 members are part of the committee.

Pillars of Basel III

1. Minimum Capital Requirements

In 2015, the Tier 1 Capital requirement increased from 4% in Basel II to 6% in Basel III. This includes 4.5% of common equity tier 1 and an extra 1.5% of additional Tier 1 capital.

2. Leverage Ratio

Basel III has brought in a non-risk leverage ratio. This was to serve as a backdrop to risk-based capital requirements. Basically, banks, in general, are required to hold a leverage ratio in excess of 3%. This is calculated dividing Tier 1 capital by the average total of consolidated bank assets.

3. About Liquidity

The introduction of Basel III also roped in two liquidity ratios i.e. Liquidity Coverage Ratio and Net Stable Funding Ratio. This ratio requires the banks to have high liquidity assets, which can stand amid 30-day stressed scenario.

Net Stable Funding Ratio requires that banks have stable funding which is above the required amount of stable funding for one year of extended stress.