• Basel III

    After the latest financial crisis in 2008-09 which led the whole world into recession, the Basel Committee on Banking Supervision (BCBS) has started working on the Basel II norms to strengthen the financial regulations and supervisory process to protect the financial system from another financial crisis.

    It also aims to improve the banking minimum capital requirements and regulatory requirements to review and regulate banks’ risk exposure and liquidity condition in much better way.

    The norms aim to tighten up the banking system in every country to withstand any financial shock by focusing on all the risks that the banks are vulnerable to. It aims to plug the gaps in the existing Basel III guidelines to make the banks for resilient to any financial crisis in the future.

    These guidelines will ensure that the banks are well capitalized and well maintained to manage all the kind possible financial and operational risks.

    New Norms of Basel III

    Basel III has added some new norms or requirements or modified some old Basel II norms for the banks to improve their minimum capital requirement. As per Basel III norms,

    • Banks are required to hold 5.5% of common equity.
    • Capital Conservation buffer should be 2.5%
    • Minimum common equity tier 1 capital plus capital conservation buffer: 8%.
    • Additional Tier 1 capital: 1.5%
    • Tier 2 Capital: 2%
    • Banks are required to hold 7% of Tier I capital of risk-weighted assets (RWA).
    • Minimum total Capital ratio (both Tier 1 and 2): 9%
    • Minimum total capital ratio plus capital reservation buffer: 11.5%
    • Capital base will be increased and new definition for capital will be introduced to calculate different capital base.
    • The risk coverage and measurement process will be modified.
    • Risk management process will be improved to make it more effective.
    • The overall economic quantity (Procyclical) with the increase in economic activity will be reduced to check the liquidity in the market. It will protect the financial system from any financial bubble.

    Basel III norms and requirements are supposed to be released by the end of 2011 and all the Group 20 (G20) countries have committed to adopt the new Basel III norms and requirements by 2012. With the adoption of Basel III, the G20 country leaders expect to protect the global financial system from any crisis or financial meltdown.

    India’s central bank the Reserve Bank of India has also issued Basel III guidelines for all the Indian Banks. As per the timeline, all banks will have to maintain the minimum common equity of 5.5% by 31st March 2015 and minimum capital conservation buffer of 2.5% by 31st March 2018.

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