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Basel III Accord - Basel 3 Norms
Contributed by :
Rajesh Goyal, [email protected]
What is Basel iii or What is Basel 3 Accord or Meaning and
Definition of Basel III Accord:-
Basel III or Basel 3 released in December, 2010 is the third in
the series of Basel Accords.
These accords deal with risk management aspects for the banking
sector. In a nut shell we can
say that Basel iii is the global regulatory standard (agreed
upon by the members of the Basel
Committee on Banking Supervision) on bank capital adequacy,
stress testing and market
liquidity risk. (Basel I and Basel II are the earlier versions
of the same, and were less
stringent)
What does Basel III is all About ?
According to Basel Committee on Banking Supervision "Basel III
is a comprehensive set of
reform measures, developed by the Basel Committee on Banking
Supervision, to strengthen the
regulation, supervision and risk management of the banking
sector".
Thus, we can say that Basel 3 is only a continuation of effort
initiated by the Basel Committee onBanking Supervision to enhance
the banking regulatory framework under Basel I and Basel II.This
latest Accord now seeks to improve the banking sector's ability to
deal with financial andeconomic stress, improve risk management and
strengthen the banks' transparency.
What are the objectives / aims of the Basel III measures ?
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Basel 3 measures aim to:
improve the banking sector's ability to absorb shocks arising
from financial and economic
stress, whatever the source
improve risk management and governance
strengthen banks' transparency and disclosures.
Thus we can say that Basel III guidelines are aimed at to
improve the ability of banks to
withstand periods of economic and financial stress as the new
guidelines are more stringent than
the earlier requirements for capital and liquidity in the
banking sector.
How Does Basel III Requirements Will Affect Indian Banks :
The Basel III which is to be implemented by banks in India as
per the guidelines issued by RBI
from time to time, will be challenging task not only for the
banks but also for GOI. It is
estimated that Indian banks will be required to rais Rs 6,00,000
crores in external capital in next
nine years or so i.e . by 2020 (The estimates vary from
organisation to organisation). Expansion
of capital to this extent will affect the returns on the equity
of these banks specially public sector
banks. However, only consolation for Indian banks is the fact
that historically they havemaintained their core and overall
capital well in excess of the regulatory minimum.
What are Three Pillars of Basel II Norms or What are the changes
in Three Pillars of Basel iii
Accord ?
Basel III: Three Pillars Still Standing :
Any one who has ever heard about Basel I and II, is most likely
must have heard about Three
Pillars of Basel. Three Pillar of Basel still stand under Basel
3.Basel III has essentially been designed to address the weaknesses
that become too obvious
during the 2008 financial crisis world faced. The intent of the
Basel Committee seems to
prepare the banking industry for any future economic downturns..
The framework enhances
bank-specific measures and includes macro-prudential regulations
to help create a more stable
banking sector.
The basic structure of Basel III remains unchanged with three
mutually reinforcing pillars.
Pillar 1 : Minimum Regulatory Capital Requirements based on Risk
Weighted Assets (RWAs) :Maintaining capital calculated through
credit, market and operational risk areas.
Pillar 2 : Supervisory Review Process : Regulating tools and
frameworks for dealing with
peripheral risks that banks face .
Pillar 3: Market Discipline : Increasing the disclosures that
banks must provide to increase the
transparency of banks
What are the Major Changes Proposed in Basel III over earlier
Accords i.e. Basel I and Basel
II?
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What are the Major Features of Basel III ?
(a) Better Capital Quality : One of the key elements of Base l 3
is the introduction of much stricter
definition of capital. Better quality capital means the higher
loss-absorbing capacity. This in
turn will mean that banks will be stronger, allowing them to
better withstand periods of stress.
(b) Capital Conservation Buffer: Another key feature of Basel
iii is that now banks will be
required to hold a capital conservation buffer of 2.5%. The aim
of asking to build conservation
buffer is to ensure that banks maintain a cushion of capital
that can be used to absorb losses
during periods of financial and economic stress.
(c) Countercyclical Buffer: This is also one of the key elements
of Basel III. The countercyclical
buffer has been introducted with the objective to increase
capital requirements in good times and
decrease the same in bad times. The buffer will slow banking
activity when it overheats and will
encourage lending when times are tough i.e. in bad times. The
buffer will range from 0% to
2.5%, consisting of common equity or other fully loss-absorbing
capital.
(d) Minimum Common Equity and Tier 1 Capital Requirements : The
minimum requirement for
common equity, the highest form of loss-absorbing capital, has
been raised under Basel III from
2% to 4.5% of total risk-weighted assets. The overall Tier 1
capital requirement, consisting of
not only common equity but also other qualifying financial
instruments, will also increase from
the current minimum of 4% to 6%. Although the minimum total
capital requirement will remain
at the current 8% level, yet the required total capital will
increase to 10.5% when combined with
the conservation buffer.
(e) Leverage Ratio: A review of the financial crisis of 2008 has
indicted that the value of many
assets fell quicker than assumed from historical experience.
Thus, now Basel III rules include a
leverage ratio to serve as a safety net. A leverage ratio is the
relative amount of capital to total
assets (not risk-weighted). This aims to put a cap on swelling
of leverage in the banking sector
on a global basis. 3% leverage ratio of Tier 1 will be tested
before a mandatory leverage ratio
is introduced in January 2018.
(f) Liquidity Ratios: Under Basel III, a framework for liquidity
risk management will be created. A
new Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio
(NSFR) are to be introduced
in 2015 and 2018, respectively.
(g) Systemically Important Financial Institutions (SIFI) : As
part of the macro-prudential framework,
systemically important banks will be expected to have
loss-absorbing capability beyond the
Basel III requirements. Options for implementation include
capital surcharges, contingent capital
and bail-in-debt.
Comparison of Capital Requirements under Basel II and Basel III
:
Requirements
Under
Basel
II
Under Basel
III
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Minimum Ratio of Total
Capital To RWAs8% 10.50%
Minimum Ratio of Common
Equity to RWAs2%
4.50% to
7.00%
Tier I capital to RWAs 4% 6.00%
Core Tier I capital to RWAs 2% 5.00%
Capital Conservation Buffers
to RWAs
None 2.50%
Leverage Ratio None 3.00%
Countercyclical Buffer None 0% to 2.50%
Minimum Liquidity
Coverage RatioNone TBD (2015)
Minimum Net Stable
Funding RatioNone TBD (2018)
Systemically important
Financial Institutions ChargeNone TBD (2011)
Click Here for: TimeLine For Implementation of Basel III ( Phase
in Arrangement
for Basel III )
Click Here for: Basel iii Accord for Capital Adequacy -
Summary
The Central banks of individual countries, which decide to
implement Basel III
norms, will issue their own norms and timeframes for
implementation of the abovebroad goals to be achieved. In India the
same are issued by Reserve Bank of
India. Originally, RBI had issued draft guidelines. However, now
final guidelines
have been issued in May 2012, and banks have been asked to
implement the same
as per schedule given by RBI.
Click Here to View :RBI Guidelines for Implementation of Basel
III Guidelines -
An overview
Click Here For : News For Basel III Implementation / News for
Basel 3
Implementation
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