Unit- 02, PPT- 04
International Banking Law
BASEL III
Basel III reforms are the response of Basel committee on banking
supervision to improve the banking sector’s ability to absorb shocks arising
from financial and economic stress.
Basel III is a regulatory Framework on Banks capital adequacy, stress test
and market liquidity risk. It is a global Framework which is voluntary. In
2010-11 the Basel committee on banking supervision agreed to reschedule
the introduction from 2013 to 2015.
However changes from April 2013 extended the implementation till March
2019. The financial crisis of 2007 to 2008 prompted the development of
Basel III.
The main aim of Basel III is to plug financial deficiencies, strengthen
Bank Capital requirement, provide specific regulations on the debt
that banks could take on their books, focus more on individual
financial institution and address the systematic risk.
Basel III aims at focusing on certain vital banking parameters such as-
capital leverage, funding and liquidity.
The key principles of Basel III are-
1- Capital Requirement-
Basel III aims at induction of much stricter definition of capital.
Better quality capital means the higher loss absorbing capacity which
will make the banks stronger and allow them to withstand periods of
stress in a better manner.
As per the original Basel III rule, from 2010 the minimum requirement
for common equity, the highest form of loss observing capital has
been prescribed at 4.5 % (up from 2 % in Basel II).
It also introduced two additional capital buffer:-
i- Capital Conservatory Buffer- This buffer is to ensure that banks
maintain a cushion of capital that can be used to absorb losses during
periods of financial and economic crises.
ii- Countercyclical buffer- the counter cyclical buffer has been
introduced with the objective to increase Capital requirement in good
time and reduce the same in bedtime.
2- Leverage ratio
Leverage ratio is a non- risk based leverage ratio which is calculated
by dividing Tier 1 capital with the Bank’s total average consolidated
assets., a minimum of 3% leverage ratio is prescribed.
The regulator's may prescribe enhanced minimum leverage ratio for
systematically important Financial Institutions
3- Liquidity requirement
Under Basel III a Framework for liquidity risk management will be
created by introducing two kinds of liquidity ratio.
liquidity coverage ratio
net stable funding ratio
4- Systematically important financial institution- systematically
important bank will be expected to have loss absorbing capital ability
beyond the Basel III requirement.
The capital requirement for of basel III guidelines will be increased in a
phased manner. Banks need to keep this in view while capital planning.
The Indian Scenario-
A- Basel III capital regulation is being implemented in a phased manner,
from April 1, 2013 in India. Banks have to comply with the regulatory limit
and minima as prescribed under Basel III capital regulation, on an ongoing
basis. Basel III capital regulations has been fully implemented as on March
31st 2019.
B- For the financial year ending March 31st 2013 bank disclosed the capital
ratio both as per Basel II and Basel III.
C- Banks are required to maintain a minimum total capital of 9% against
8% (International) prescribed by the basal committee. Since many items
are excluded from capital definition under Basel III,
banks have to raise additional capital.
D- Common equity Tier 1 capital must be at least 5.5 % of RWA as against
4.5 prescribed.
E- Banks are required to maintain a capital conservation buffer of 2.5%
comprising of common equity Tier 1 capital above the regulatory minimum
Capital requirement of 9%.
F- Under Basel III Indian banks are required to maintain Tier 1 capital of 7%
as against 6% under Basel II.
G- Some instruments including those with the characteristics of Dabts are
excluded for arriving at tr1 Capital.
Under the new norms consolidated capital of any insurance or non
financial subsidiaries has to be excluded while calculating capital
adequacy.
H- RBI has set leverage ratio at 4.5 % in India most Bank do not have
large derivative activities which necessitates enhanced cover for
counterparty credit risk. The pressure on bank should be minimal on
this account.
Unit-2 is completed
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