What are the Three Pillars of Basel III?
By BYJU'S Exam Prep
Updated on: November 9th, 2023
The Three Pillars of Basel III are Market discipline, supervisory process, and minimum capital requirement. The Basel III framework addresses high liquidity risk, stress testing, and adequate bank capital. Basel Norms III aims to increase bank liquidity while reducing bank leverage. Basel III was developed by the Basel Committee on Banking Supervision (BCBS).
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Three Pillars of Basel III
It was created in response to the flaws in financial regulation that the 2007–2008 financial crisis exposed. Basel regulation now consists of three pillars, namely capital requirements (Pillar 1), supervisory review (Pillar 2), and market discipline (Pillar 3).
First Pillar: Capital Requirements
The first pillar, the Minimum Capital Requirement, refers primarily to overall risk, including credit risk, market risk, and operational risk. It aims to strengthen the resilience of banks by ensuring that they have sufficient capital to absorb losses during periods of financial stress.
Second Pillar: Supervisory Review
- Making sure that banks have enough capital to cover all the risks associated with their work is the main objective of the second pillar, also known as the supervisory process.
- The Internal Capital Adequacy Assessment Process (ICAAP) has been implemented by Indian banks, per instructions from the Reserve Bank of India (RBI).
- Using this tool, banks can determine whether their capital is adequate given their risk profile and develop strategies to maintain capital levels.
Third Pillar: Market Discipline
- 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 3 Pillars of Basel III include Minimum Capital Requirement (first pillar), the Supervisory Review (second pillar), and Market Discipline (third pillar). Basel III is a set of international regulations aimed at improving the resilience of the banking system. These pillars ensure that banks can reduce the risk for the depositors by having enough capital.
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