Basel 3 — let’s explore !!!

Basel III, sometimes known as Basel 3, was signed in December 2010 and is the third of the Basel Accords. These agreements deal with risk management in the banking industry.

Basel III is the global regulatory standard for bank capital adequacy, stress testing, and market liquidity risk, so to speak. (Earlier versions of the same, Basel I and Basel II, were less strict.) Norms will be phased in beginning March 31, 2015, and will be fully implemented by March 31, 2018.

What is the purpose of Basel III?

According to the Basel Committee on Banking Supervision, “Basel III is a comprehensive package of reform initiatives devised by the Basel Committee on Banking Supervision to improve the supervision, regulation, and risk management of the banking system.”

Basel III is thus only a continuation of the Basel Committee on Banking Supervision’s efforts to strengthen the banking regulatory framework under Basel I and Basel II. This new Accord aims to boost the banking sector’s ability to deal with financial and economic stress, as well as risk management and transparency.

The Basel 3 measures are aimed to:

· Enhance the banking sector’s ability to absorb the ups and downs that come with financial and economic uncertainty.

· Improve risk management and governance in the banking industry.

· Transparency and disclosures in banks should be improved.

As a result, we can state that the Basel III rules are aimed at improving banks’ capacity to resist moments of economic and financial stress, as the new criteria are more strict than previous capital and liquidity requirements in the banking industry.

What are the primary differences between Basel iii and previous accords, such as Basel I and Basel ii?

Better Capital Quality: The implementation of a considerably tighter definition of capital is one of the fundamental features of Basel 3. The bigger the loss-absorbing capacity of capital, the better. As a result, banks will be stronger, allowing them to better endure stressful circumstances.

Capital Conservation Buffer: Another important component of Basel iii is that banks will now be obliged to maintain a capital conservation buffer of 2.5 percent. The goal of the conservation buffer request is to guarantee that banks have a capital cushion that may be utilized to absorb losses during times of financial and economic hardship.

Countercyclical Buffer:

Another crucial feature of Basel III is the countercyclical buffer. The countercyclical buffer was created with the goal of increasing capital requirements during good times and lowering them during poor times.

When the buffer overheats, it will delay banking activity and boost lending when things are rough, i.e., in poor times. The buffer will be made up of common stock or other fully loss-absorbing capital and will vary from 0% to 2.5 percent.

Common Equity and Tier 1 Capital Requirements:

Minimum Common Equity and Tier 1 Capital Requirements: Basel III increased the minimum requirement for common stock, the strongest type of loss-absorbing capital, from 2% to 4.5 percent of total risk-weighted assets.

The entire Tier 1 capital requirement, which includes not just common equity but also other qualified financial instruments, will also rise from 4 percent to 6 percent. Although the minimum total capital requirement will stay at 8%, when paired with the conservation buffer, the needed total capital will rise to 10.5 percent.

Leverage Ratio:

An examination of the 2008 financial crisis found that the value of several assets declined faster than expected based on previous experience. As a result, Basel III rules now incorporate a leverage ratio as a safety net. The leverage ratio is the quantity of capital compared to total assets (not risk-weighted).

How Will Basel III Affect Indian Banks?

Basel III, which must be implemented by Indian banks in accordance with RBI norms, would be a difficult undertaking not just for banks but also for the Indian government. Indian banks are expected to need to raise Rs 6,00,000 crores in external capital during the nine years, or by 2020. (Estimates vary from organization to organization).

The returns on equity of these institutions, particularly public sector banks, will be impacted by such capital expansion. The fact that Indian banks have typically kept core and total capital levels considerably above the statutory requirement is the only comfort.