BASEL III is a global regulatory standard on bank capital adequacy, stress testing and market liquidity risk agreed upon by the members of the Basel Committee on Banking Supervision in 2010-11.[1]
This, the third of the Basel Accords (see Basel I, Basel II) was developed in a response to the deficiencies in financial regulation revealed by the late-2000s financial crisis. Basel III strengthens bank capital requirements and introduces new regulatory requirements on bank liquidity and bank leverage.
The OECD estimates that the implementation of Basel III will decrease annual GDP growth by 0.05 to 0.15 percentage point.[2][3]. Outside the banking industry itself, criticism was muted. Bank directors would be required to know market liquidity conditions for major asset holdings, to strengthen accountability for any major losses.
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Basel III will require banks to hold 4.5% of common equity (up from 2% in Basel II) and 6% of Tier I capital (up from 4% in Basel II) of risk-weighted assets (RWA). Basel III also introduces additional capital buffers, (i) a mandatory capital conservation buffer of 2.5% and (ii) a discretionary countercyclical buffer, which allows national regulators to require up to another 2.5% of capital during periods of high credit growth. In addition, Basel III introduces a minimum 3% leverage ratio and two required liquidity ratios. The Liquidity Coverage Ratio requires a bank to hold sufficient high-quality liquid assets to cover its total net cash flows over 30 days; the Net Stable Funding Ratio requires the available amount of stable funding to exceed the required amount of stable funding over a one-year period of extended stress.[4]
As on Sept 2010, Proposed Basel III norms ask for ratios as: 7-9.5%(4.5% +2.5%(conservation buffer) + 0-2.5%(seasonal buffer)) for Common equity and 8.5-11% for tier 1 cap and 10.5 to 13 for total capital (Proposed Basel III Guidelines: A Credit Positive for Indian Banks)'
The US Federal Reserve announced in December 2011 that it would implement substantially all of the Basel III rules. [1]. It summarized them as follows [2], and made clear they would apply not only to banks but to all institutions with more than US$50 billion in assets:
It was unclear as of December 2011 how these rules would apply to insurance, hedge funds and other large financial players. The announced intent was "to limit the dangers of big financial firms being heavily intertwined" [3].
An OECD study [2] released on 17 February 2011, estimates that the medium-term impact of Basel III implementation on GDP growth is in the range of −0.05 to −0.15 percentage point per year. Economic output is mainly affected by an increase in bank lending spreads as banks pass a rise in bank funding costs, due to higher capital requirements, to their customers. To meet the capital requirements effective in 2015 (4.5% for the common equity ratio, 6% for the Tier 1 capital ratio), banks are estimated to increase their lending spreads on average by about 15 basis points. The capital requirements effective as of 2019 (7% for the common equity ratio, 8.5% for the Tier 1 capital ratio) could increase bank lending spreads by about 50 basis points. The estimated effects on GDP growth assume no active response from monetary policy. To the extent that monetary policy will no longer be constrained by the zero lower bound, the Basel III impact on economic output could be offset by a reduction (or delayed increase) in monetary policy rates by about 30 to 80 basis points.[7]
Basel III is an opportunity as well as a challenge for banks. It can provide a solid foundation for the next developments in the banking sector, and it can ensure that past excesses are avoided. Basel III is changing the way that banks address the management of risk and finance. The new regime seeks much greater integration of the finance and risk management functions. This will probably drive the convergence of the responsibilities of CFOs and CROs in delivering the strategic objectives of the business. However, the adoption of a more rigorous regulatory stance might be hampered by a reliance on multiple data silos and by a separation of powers between those who are responsible for finance and those who manage risk. The new emphasis on risk management that is inherent in Basel III requires the introduction or evolution of a risk management framework that is as robust as the existing finance management infrastructures. As well as being a regulatory regime, Basel III in many ways provides a framework for true enterprise risk management, which involves covering all risks to the business.[8]
Date | Milestone: Capital Requirements |
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2013 | Minimum capital requirements: Start of the gradual phasing-in of the higher minimum capital requirements. |
2015 | Minimum capital requirements: Higher minimum capital requirements are fully implemented. |
2016 | Conservation buffer: Start of the gradual phasing-in of the conservation buffer. |
2019 | Conservation buffer: The conservation buffer is fully implemented. |
Date | Milestone: Leverage Ratio |
---|---|
2011 | Supervisory monitoring: Developing templates to track the leverage ratio and the underlying components. |
2013 | Parallel run I: The leverage ratio and its components will be tracked by supervisors but not disclosed and not mandatory. |
2015 | Parallel run II: The leverage ratio and its components will be tracked and disclosed but not mandatory. |
2017 | Final adjustments: Based on the results of the parallel run period, any final adjustments to the leverage ratio. |
2018 | Mandatory requirement: The leverage ratio will become a mandatory part of Basel III requirements. |
Date | Milestone: Liquidity Requirements |
---|---|
2011 | Observation period: Developing templates and supervisory monitoring of the liquidity ratios. |
2015 | Introduction of the LCR: Introduction of the Liquidity Coverage Ratio (LCR). |
2018 | Introduction of the NSFR: Introduction of the Net Stable Funding Ratio (NSFR). |
In addition to articles used for references (see References), this section lists links to recent high-quality publicly-available studies on Basel III. This section may be updated frequently as Basel III is currently under development.
Date | Source | Article Title / Link | Comments |
---|---|---|---|
Dec 2011 | OECD: Economics Department | Systemically Important Banks | OECD analysis on the failure of bank regulation and markets to discipline systemically important banks. |
Jun 2011 | BNP Paribas: Economic Research Department | Basel III: no Achilles' spear | BNP Paribas' Economic Research Department study on Basel III. |
Feb 2011 | OECD: Economics Department | Macroeconomic Impact of Basel III | OECD analysis on the macroeconomic impact of Basel III. |
Jan 2011 | Moody's Analytics | Basel III New Capital and Liquidity Standards FAQs | Basel III standards, key elements of new regulations, framework, and key implementation dates. |
May 2010 | OECD Journal: Financial Market Trends |
Thinking Beyond Basel III | OECD study on Basel I, Basel II and III. |
May 2010 | Bloomberg BusinessWeek |
FDIC’s Bair Says Europe Should Make Banks Hold More Capital | Bair said regulators around the world need to work together on the next round of capital standards for banks ... the next round of international standards, known as Basel III, which Bair said must meet “very aggressive” goals. |
May 2010 | Reuters | FACTBOX-G20 progress on financial regulation | Finance ministers from the G20 group of industrial and emerging countries meet in Busan, Korea, on June 4–5 to review pledges made in 2009 to strengthen regulation and learn lessons from the financial crisis. |
May 2010 | The Economist | The banks battle back A behind-the-scenes brawl over new capital and liquidity rules |
"The most important bit of reform is the international set of rules known as “Basel 3”, which will govern the capital and liquidity buffers banks carry. It is here that the most vicious and least public skirmish between banks and their regulators is taking place." |
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