What are the three pillars of Basel III?

By Ritesh|Updated : September 6th, 2022

Market discipline, the supervisory process, and the minimum capital requirement are the three pillars of Basel III. The Basel III framework addresses bank capital sufficiency, stress testing, and high liquidity risk.

  • Basel Norms III seeks to lessen bank leverage and boost bank liquidity.
  • The Basel Committee on Banking Supervision created Basel III (BCBS).
  • It was formed in response to the vulnerabilities in financial regulation that the financial crisis of 2007-2008 revealed.

Three Pillars of Basel III

First pillar:

The first pillar, the Minimum Capital Requirement, refers primarily to overall risk, including credit risk, market risk, and operational risk.

Second pillar:

  • The primary goal of the second pillar, or the supervisory process, is to ensure that banks have enough capital to cover all the risks involved in their work.
  • The Reserve Bank of India (RBI) has instructed banks in India to implement the performance of the entire procedure known as the Internal Capital Adequacy Assessment Process (ICAAP).
  • Banks can use this tool to assess capital adequacy concerning risk profile and adopt strategies to maintain capital levels.

The third pillar:

  • The idea of the third pillar is to supplement the first and second pillars.
  • It is a discipline a bank follows, such as disclosing its capital structure, Tier-I, and Tier-II capital, and capital adequacy assessment approaches.

In the above discussion, we could understand that Basel II and the upcoming main goals of Basel III are to ensure that banks have enough capital and to reduce risk to consumers and depositors.

Summary:

What are the three pillars of Basel III?

The first pillar, the Minimum Capital Requirement, refers primarily to overall risk, including credit risk, market risk, and operational risk. The second pillar, i.e., the supervisory process, is to ensure that banks have sufficient capital to support all the risks associated with their business.

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