Basel III, sometimes known as Basel 3, was signed in December 2010 and is the third of the Basel Accords. These agreements deal with managing risk in the banking industry. Basel III Norms are the international regulatory standard for bank capital sufficiency, stress testing, and market liquidity risk.
About Basel III Norms
"Basel III Norms are a comprehensive package of reform measures designed by the Basel Committee on Banking Supervision to strengthen the regulation, supervision, and risk management of the banking sector," according to the Basel Committee on Banking Supervision.
Basel III is thus merely a continuation of the Basel Committee on Banking Supervision's efforts to strengthen the banking regulatory regime under Basel I and Basel II. This new Accord aims to boost the banking sector's capacity to deal with economic and financial stress, as well as risk management and transparency.
Aim Behind Basel III Norms
The aims behind Basel III Norms are:
- Enhance the banking sector's capacity to absorb the ups and downs that come with financial and economic uncertainty.
- Improve the banking sector's risk management and governance.
- Improve transparency and disclosures in banks.
Basel III Norms are aimed at improving banks' ability to resist moments of financial and economic stress, as the proposed rules are more strict than previous capital and liquidity requirements in the banking sector.
Changes Reflected in the Basel III Norms
The changes proposed earlier in the Basel Accords pertaining to Basel I and Basel II are:
- The implementation of a considerably stronger definition of capital is one of the fundamental features of Basel III Norms. The bigger the loss-absorbing capacity of capital, the better. As a result, banks will be sturdier, enabling them to better endure stressful circumstances.
- Another important component of the Basel III Norms is that banks will now be required to maintain capital conservation of 2.5 percent. The goal of the conservation buffer request is to guarantee that banks have a capital cushion that may be used to cover losses during times of economic and financial hardship.
- Another crucial feature of the Basel III Norms 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 slow financial services activity and boost lending when things are rough, i.e. in poor times. The buffer will be made up of common equity or even other fully loss-absorbing capital and will vary from 0% to 2.5 percent.
- 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 Norms now incorporate a leverage ratio as a safety net. The leverage ratio is the quantity of capital relative to overall assets (not risk-weighted). This attempts to limit the global expansion of leveraging in the banking sector. Before a mandated leverage ratio is implemented in January 2018, a 3% leverage ratio of Tier 1 would be tested.
- Basel III Norms will establish a framework for managing liquidity risk. In 2015 and 2018, a revised Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) would be adopted.
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Effects of Basel III Norms on Indian Banks
Basel III Norms, which must be implemented by Indian banks in accordance with RBI norms, will be a difficult undertaking not only for banks as well as for the Indian government. The fact that Indian banks have historically kept core and overall capital levels considerably above the statutory requirement is the only consolation.
The banking industry has changed dramatically in terms of structure, growth, and innovation. It has become vulnerable to a variety of dangers as a result of the numerous complexities involved. Implementing Basel III Norms regulations will, without a doubt, protect Indian banks from domestic and financial shocks, minimizing financial sector spillover risks to the wider economy. Indian banks should seize this chance to become stronger, more efficient, and more future-proof businesses.
FAQs on Basel III Norms
Q.1. What are the Basel III Norms?
Basel III Norms are a set of regulatory rules for developing universal banking standards across countries.
Q.2. Is India compliant with Basel III Norms?
In India, the deadline for implementing Basel III Norms was March 2019. It has been rescheduled for March 2020.
Q.3. What is the Basel III Norms leverage ratio, and what does it mean?
The capital measure (the numerator) divided by the exposure measure (the denominator) yields the Basel III norms leverage ratio, which is stated as a percentage: Capital measure = Leverage ratio.
Q.4. Who were the brains behind the Basel III Norms?
The Basel Committee on Banking Supervision designed Basel III Norms as a set of internationally agreed-upon policies in response to the global financial of 2007-09.