What Is Basel III?
Basel III is a global regulatory system evolved by the Basel Committee on Banking Supervision (BCBS) to enhance banks' regulation, supervision, and risk management. It was launched as a response to the 2008 financial crisis to strengthen banks' resilience to economic shocks and avoid future financial crises.
Principles Of Basel III
- Increasing Capital Requirements: Banks must hold better quality capital (predominantly Common Equity Tier 1) to absorb losses and enhance financial resilience.
- Enhancing Risk Management and Supervision: Enhances risk coverage, such as credit risk, market risk, and operational risk.
- Strengthening Leverage and Liquidity Requirements: This policy proposes leverage and liquidity requirements and measures, including the Liquidity Coverage Ratio (LCR) and the Net Stable Funding Ratio (NSFR), to require financial institutions to hold adequate liquidity for managing adverse situations.
Advantages Of Basel III
- Better Financial Stability: Reduces bank failures by raising capital and liquidity requirements.
- Improved Risk Management: This makes banks more careful about lending and investment risks.
- Improved Liquidity: Liquidity requirements enable banks to survive short-term financial pressures.
- Less Systemic Risk: Avoids excessive leverage and inter-connectedness among banks, making another financial crisis less likely.
Key Takeaways
Basel III is a worldwide regulatory framework that is intended to increase banks' capital requirements, risk management, and liquidity in order to prevent financial crises. It mandates a minimum Common Equity Tier 1 (CET1) of 4.5% and overall capital of 8%, including a buffer for capital conservation of 2.5%. It also sets a minimum 3% leverage ratio, Liquidity Coverage Ratio (LCR) to ensure short-term stability, and Net Stable Funding Ratio (NSFR) for long-term resilience. Basel III increases banking stability and investor confidence while avoiding excessive risk-taking by enhancing risk assessment, minimising systemic risk, and improving financial transparency.
