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Concept
Basel III
Summary
Basel III is the third Basel Accord, a framework that sets international standards for bank capital adequacy, stress testing, and liquidity requirements. Augmenting and superseding parts of the Basel II standards, it was developed in response to the deficiencies in financial regulation revealed by the financial crisis of 2007–08. It is intended to strengthen bank capital requirements by increasing minimum capital requirements, holdings of high quality liquid assets, and decreasing bank leverage.
Basel III was published by the Basel Committee on Banking Supervision in November 2010, and was scheduled to be introduced from 2013 until 2015; however, implementation was extended repeatedly to 1 January 2022 and then again until 1 January 2023, in the wake of the COVID-19 pandemic.
The new standards that come into effect in January 2023, that is, the Fundamental Review of the Trading Book (FRTB) and the Basel III: Finalising post-crisis reforms, are sometimes referred to as Basel IV. However, the secretary general of the Basel Committee said, in a 2016 speech, that he did not believe the changes are substantial enough to warrant that title and the Basel Committee refer to only three Basel Accords.
Basel III aims to strengthen the requirements in the Basel II regulatory standards for banks. In addition to increasing capital requirements, it introduces requirements on liquid asset holdings and funding stability, thereby seeking to mitigate the risk of a run on the bank.
Capital requirementCapital adequacy ratio and List of bank stress tests
The original Basel III rule from 2010 required banks to fund themselves with 4.5% of Common Equity Tier 1 (CET1) (up from 2% in Basel II) of risk-weighted assets (RWAs). Since 2015, a minimum CET1 ratio of 4.5% must be maintained at all times by the bank. This ratio is calculated as follows:
The minimum Tier 1 capital increases from 4% in Basel II to 6%, applicable in 2015, over RWAs. This 6% is composed of 4.5% of CET1, plus an extra 1.5% of Additional Tier 1 (AT1).
Official source
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