Basel-3

Prepared By Jaykishan Fefar

What is Basel iii or What is Basel 3 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".

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Thus, we can say that Basel 3 is only a continuation of effort initiated by the Basel Committee on Banking 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 and economic stress, improve risk management and strengthen the banks' transparency.

What are the objectives / aims of the Basel III measures ?

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.

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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. 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 have maintained their core and overall capital well in excess of the regulatory minimum.

How Does Basel III Requirements Will Affect Indian Banks

Three Pillars of Basel iii Accord

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 : the disclosures that banks must increase the transparency of banks Increasing provide to

Comparison of Capital Requirements under Basel II and Basel III

Requirements Minimum Ratio of Total Capital To RWAs Minimum Ratio of Common Equity to RWAs Tier I capital to RWAs Core Tier I capital to RWAs Capital Conservation Buffers to RWAs Leverage Ratio Countercyclical Buffer Minimum Liquidity Coverage Ratio Minimum Net Stable Funding Ratio Systemically important Financial Institutions Charge Under Basel Under Basel III II 8% 10.50% 4.50% to 2% 7.00% 4% 6.00% 2% 5.00% None 2.50% None 3.00% None 0% to 2.50% None TBD (2015) None TBD (2018) None TBD (2011)

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