​​​​​​​Basel III Framework and Banking Regulation

🔹 What is Basel III?

Basel III is an international regulatory framework developed by the Basel Committee on Banking Supervision (BCBS). It was introduced after the 2008 global financial crisis to strengthen regulation, supervision, and risk management within the banking sector.

It is the third set of Basel Accords, following Basel I (1988) and Basel II (2004).

🔐 Key Objectives of Basel III

1. Improve the banking sector’s ability to absorb shocks

2. Reduce the risk of financial contagion

3. Promote transparency and market discipline

📊 Core Components of Basel III

1. Capital Requirements

Banks must hold a minimum level of capital to protect against unexpected losses:

• Common Equity Tier 1 (CET1): At least 4.5% of risk-weighted assets

• Tier 1 Capital: Minimum 6%

• Total Capital: Minimum 8%

Capital Conservation Buffer of 2.5% is added on top to absorb losses during stress periods.

2. Leverage Ratio

A non-risk-based leverage ratio acts as a backstop to the risk-weighted capital requirements:

• Minimum 3% leverage ratio (Tier 1 Capital / Total Exposures)

3. Liquidity Standards

a. Liquidity Coverage Ratio (LCR):

• Banks must hold enough high-quality liquid assets (HQLA) to cover 30 days of net cash outflows.

b. Net Stable Funding Ratio (NSFR):

• Ensures that long-term assets are funded with at least 1 year of stable liabilities.

4. Countercyclical Buffer

• An additional capital buffer of up to 2.5%, imposed in periods of high credit growth, to reduce systemic risk.

5. Systemically Important Banks (G-SIBs)

• Global banks that pose systemic risks must hold additional capital surcharges.

⚖️ Why Basel III Matters

• Helps prevent bank failures

• Encourages better risk management

• Builds confidence in the global banking system

• Reduces chances of another financial crisis

🏁 Implementation Timeline

• Basel III began implementation in 2013, with phased requirements.

• Full compliance was targeted for 2023, with some elements extended to 2025 due to COVID-19 disruptions.

✅ Summary