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What is Basel III?
Basel III is a set of global regulatory standards established by the Basel Committee on Banking Supervision (BCBS) to strengthen the regulation, supervision, and risk management practices of banks worldwide. The key objectives of Basel III are to enhance the resilience of the banking sector, improve risk management and transparency, and promote financial stability. It represents a significant reform of the previous Basel II framework and was developed in response to lessons learned from the 2008 financial crisis.
Some of the main features and requirements of Basel III include:
Capital Adequacy: Basel III introduces more stringent capital requirements for banks. It increases the minimum common equity Tier 1 (CET1) capital requirement and strengthens the quality and composition of capital. It also introduces a capital conservation buffer and a countercyclical buffer to help banks withstand periods of stress.
Liquidity Standards: Basel III establishes liquidity requirements to ensure that banks maintain sufficient liquidity to meet their obligations in times of stress. It introduces two liquidity ratios: the Liquidity Coverage Ratio (LCR) and the Net Stable Funding Ratio (NSFR). The LCR focuses on short-term liquidity risk, while the NSFR addresses longer-term funding stability.
Leverage Ratio: Basel III introduces a leverage ratio as a non-risk-based measure to limit excessive leverage in the banking system. It sets a minimum requirement for Tier 1 capital in relation to a bank's total exposure.
Systemically Important Banks: Basel III addresses the systemic risks posed by globally systemically important banks (G-SIBs). It introduces additional capital requirements, loss absorbency mechanisms, and enhanced supervisory frameworks for G-SIBs to reduce the likelihood of their failure and minimize the impact on the financial system in case of failure.
Counterparty Credit Risk: Basel III strengthens the regulation and supervision of counterparty credit risk in derivative transactions. It introduces higher capital requirements for counterparty credit risk exposures and promotes the use of central clearing and collateralization.
Disclosure and Reporting: Basel III enhances the disclosure and reporting requirements for banks, aiming to improve transparency and enable market participants and regulators to assess banks' risk profiles and capital adequacy.
The implementation of Basel III is carried out by national regulators and central banks in each jurisdiction, which may tailor certain aspects of the standards to their specific circumstances. The phased implementation of Basel III started in 2013 and continued over several years, with different components gradually coming into effect.
Basel III is covered in more detail in module 2 of the CQF program.