1) What it is

  • Basel III = a global regulatory framework for banks, developed by the Basel Committee on Banking Supervision (BCBS) after the 2007–2009 financial crisis.
  • Goal: strengthen regulation, supervision, and risk management in the banking sector.
  • Builds on Basel I (1988) and Basel II (2004).

Think of it as the “safety rulebook” for banks worldwide.

2) Objectives

  • Improve banks’ ability to absorb shocks (financial and economic stress).
  • Reduce risk of banking crises.
  • Improve transparency and risk management practices.

3) Key Components

a) Capital requirements

  • Higher minimum capital ratios than Basel II.
  • Common Equity Tier 1 (CET1) ratio ≥ 4.5% (up from 2% in Basel II).
  • Total capital ratio ≥ 8% of risk-weighted assets.

b) Capital buffers

  • Capital conservation buffer = +2.5% CET1.
  • Countercyclical buffer = up to 2.5% more in good times to prepare for downturns.

c) Leverage ratio

  • Non-risk-based backstop: Tier 1 capital / total exposure ≥ 3%.

d) Liquidity requirements

  • Liquidity Coverage Ratio (LCR): enough high-quality liquid assets to cover 30 days of net cash outflow.
  • Net Stable Funding Ratio (NSFR): stable funding ≥ required funding over 1 year horizon.

e) Systemic risk measures

  • Extra capital requirements for globally systemically important banks (G-SIBs).

4) Timeline

  • Announced in 2010, phased in starting 2013.
  • Full implementation (“Basel III finalization”, sometimes called Basel IV) targeted around 2023–2025 (delayed due to COVID).

5) Why It Matters

  • Forces banks to be more resilient.
  • Limits excessive leverage and risky liquidity practices.
  • Protects depositors, financial system stability, and broader economy.

6) Example

Before Basel III:

  • A bank could hold only ~2% equity against risky assets.
  • Small market downturn = insolvency risk.

With Basel III:

  • Must hold ≥7% CET1 (4.5% minimum + 2.5% buffer).
  • Stronger liquidity standards prevent bank runs.

Summary

  • Basel III = global banking regulation standard.
  • Introduces higher capital ratios, capital buffers, leverage ratio, liquidity requirements, systemic risk buffers.
  • Designed to prevent another global financial meltdown like 2008.