EBI Publications

Financial Infos Issue (15) BASEL III is a new global regulatory standard on bank capital adequacy and liquidity agreed upon by the members of the Basel Committee on Banking Supervision in December 2010.The third Basel Accord was developed in a response to the deficiencies in financial regulation revealed by the global financial crisis: It is a comprehensive set of reforms measures aiming to improve global financial stability, enhance risk management and governance and strength bank’s transparency and disclosure. Banks have to comply gradually with Basel III, as the full implementation of the new rules is not expected before 2019. According to Basel III, Tier 1 capital requirement ratio will increase from 4% to 6% of risk-weighted assets (RWA). It will also require banks to hold 4.5% of common equity (up from 2% in Basel II). The new rules introduce additional capital buffers: (i) A mandatory capital conservation buffer of 2.5%. (ii) A discretionary countercyclical buffer, which allows national regulators to require a range that varies between zero and 2.5% to total risk weighted assets, during periods of high credit growth. In addition, Basel III introduces a minimum 3% leverage ratio and two complementary required liquidity ratios. The Liquidity Coverage Ratio requires a bank to hold sufficient unencumbered high-quality liquid assets, under a prescribed stress scenarios, to cover its total cumulative net cash outflow over 30 days; the Net Stable Funding Ratio requires the available amount of stable funding to exceed the required amount of stable funding over one-year period under conditions of extended stress. Basel III proposals for reform: “Moving from Basel II to Basel III” Basel II never came properly into effect. In July 2009, the Basel committee already adopted changes that would boost capital held for market risk in the trading book portfolio. BASEL III