BASEL I

Basel I is the round of deliberations by central bankers from around the world, and in 1988, the Basel Committee
on Banking Supervision (BCBS) in Basel, Switzerland, published a set of minimum capital requirements for
banks. This is also known as the 1988 Basel Accord, and was enforced by law in the Group of Ten (G-10) countries
in 1992. A new set of rules known as Basel II was later developed with the intent to supersede the Basel I accords.
However they were criticized by some for allowing banks to take on additional types of risk, which was
considered part of the cause of the US subprime financial crisis that started in 2008. In fact, bank regulators in the
United States took the position of requiring a bank to follow the set of rules (Basel I or Basel II) giving the more
conservative approach for the bank. Because of this it was anticipated that only the few very largest US Banks
would operate under the Basel II rules, the others being regulated under the Basel I framework. Basel III was
developed in response to the financial crisis; it does not supersede either Basel I or II, but focuses on different
issues primarily related to the risk of a bank run.

Background
The Committee was formed in response to the messy liquidation of Cologne-based Herstatt Bank in 1973. On 26
June 1974 a number of banks had released Deutschmarks (the German currency) to the Herstatt Bank in exchange
for dollar payments deliverable in New York. Due to differences in the time zones, there was a lag in the dollar
payment to the counterparty banks; during this lag period, before the dollar payments could be effected in New
York, the Herstatt Bank was liquidated by German regulators.
This incident prompted the G-10 nations to form the Basel Committee on Banking Supervision in late 1974, under
the auspices of the Bank for International Settlements (BIS) located in Basel, Switzerland.

Main Framework
Basel I, that is, the 1988, Basel Accord, is primarily focused on credit risk and appropriate risk-weighting of assets.
Assets of banks were classified and grouped in five categories according to credit risk, carrying risk weights of 0%
(for example cash, bullion, home country debt like Treasuries), 20% (securitisations such as mortgage-backed
securities (MBS) with the highest AAA rating) 50%, 100% (for example, most corporate debt), and some assets
given No rating. Banks with an international presence are required to hold capital equal to 8% of their riskweighted assets (RWA).
The tier 1 capital ratio = tier 1 capital / all RWA
The total capital ratio = (tier 1 + tier 2 + tier 3 capital) / all RWA
Leverage ratio = total capital/average total assets
Banks are also required to report off-balance-sheet items such as letters of credit, unused commitments, and
derivatives. These all factor into the risk weighted assets. The report is typically submitted to the Federal Reserve
Bank as HC-R for the bank-holding company and submitted to the Office of the Comptroller of the
Currency (OCC) as RC-R for just the bank.
From 1988 this framework was progressively introduced in member countries of G-10, comprising 13 countries as
of 2013: Belgium, Canada, France, Germany, Italy, Japan, Luxembourg,Netherlands, Spain, Sweden, Switzerland,
United Kingdom and the United States of America.
Over 100 other countries also adopted, at least in name, the principles prescribed under Basel I. The efficacy with
which the principles are enforced varies, even within nations of the Group.

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BASEL II

Basel II

Bank for International Settlements

Basel Accords
Basel I
Basel II
Basel III
Background

Banking
Monetary policy
Central bank
Risk
Risk management
Regulatory capital
Tier 1
Tier 2
Pillar 1: Regulatory Capital

Credit risk
Standardized
IRB Approach
F-IRB
A-IRB
PD
LGD
EAD
Operational risk
Basic
Standardized
AMA
Market risk
Duration
Value at risk
Pillar 2: Supervisory Review

Economic capital
Liquidity risk
Legal risk

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Pillar 3: Market Disclosure

Disclosure

BASEL II is the second of the Basel Accords, (now extended and effectively superseded[clarification needed] by Basel III),
which are recommendations on banking laws and regulations issued by the Basel Committee on Banking
Supervision.
Basel II, initially published in June 2004, was intended to create an international standard for banking regulators
to control how much capital banks need to put aside to guard against the types of financial and operational risks
banks (and the whole economy) face. One focus was to maintain sufficient consistency of regulations so that this
does not become a source of competitive inequality amongst internationally active banks. Advocates of Basel II
believed that such an international standard could help protect the international financial system from the types
of problems that might arise should a major bank or a series of banks collapse. In theory, Basel II attempted to
accomplish this by setting up risk and capital management requirements designed to ensure that a bank
has adequate capital for the risk the bank exposes itself to through its lending and investment practices. Generally
speaking, these rules mean that the greater risk to which the bank is exposed, the greater the amount of capital
the bank needs to hold to safeguard its solvency and overall economic stability.
Politically, it was difficult to implement Basel II in the regulatory environment prior to 2008, and progress was
generally slow until that year's major banking crisis caused mostly by credit default swaps, mortgage-backed
security markets and similar derivatives. As Basel III was negotiated, this was top of mind, and accordingly much
more stringent standards were contemplated, and quickly adopted in some key countries including the USA.

Objective
The final version aims at:
1. Ensuring that capital allocation is more risk sensitive;
2. Enhance disclosure requirements which would allow market participants to assess the capital adequacy
of an institution;
3. Ensuring that credit risk, operational risk and market risk are quantified based on data and formal
techniques;
4. Attempting to align economic and regulatory capital more closely to reduce the scope for regulatory
arbitrage.
While the final accord has at large addressed the regulatory arbitrage issue, there are still areas where
regulatory capital requirements will diverge from the economic capital.

The accord in operation

Basel II uses a "three pillars" concept (1) minimum capital requirements (addressing risk), (2) supervisory
review and (3) market discipline.
The Basel I accord dealt with only parts of each of these pillars. For example: with respect to the first Basel II
pillar, only one risk, credit risk, was dealt with in a simple manner while market risk was an afterthought;
operational risk was not dealt with at all.

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The first pillar

The first pillar deals with maintenance of regulatory capital calculated for three major components of risk that a
bank faces: credit risk, operational risk, and market risk. Other risks are not considered fully quantifiable at this
stage.
The credit risk component can be calculated in three different ways of varying degree of sophistication,
namely standardized approach, Foundation IRB, Advanced IRB and General IB2 Restriction. IRB stands for
"Internal Rating-Based Approach".
For operational risk, there are three different approaches basic indicator approach or BIA, standardized
approach or TSA, and the internal measurement approach (an advanced form of which is the advanced
measurement approach or AMA).
For market risk the preferred approach is VAR (value at risk).
As the Basel II recommendations are phased in by the banking industry it will move from standardized
requirements to more refined and specific requirements that have been developed for each risk category by each
individual bank. The upside for banks that do develop their own be spoke risk measurement systems is that they
will be rewarded with potentially lower risk capital requirements. In the future there will be closer links between
the concepts of economic and regulatory capital.

The second pillar-Supervisory Review

This is a regulatory response to the first pillar, giving regulators better 'tools' over those previously available. It
also provides a framework for dealing with systemic risk, risk, concentration, strategic risk, reputational
risk, liquidity risk and legal risk, which the accord combines under the title of residual risk. Banks can review
their risk management system.
It is the Internal Capital Adequacy Assessment Process (ICAAP) that is the result of Pillar II of Basel II accords.

The third pillar-Disclosures

This pillar aims to complement the minimum capital requirements and supervisory review process by developing
a set of disclosure requirements which will allow the market participants to gauge the capital adequacy of an
institution.
Market discipline supplements regulation as sharing of information facilitates assessment of the bank by others,
including investors, analysts, customers, other banks, and rating agencies, which leads to good corporate
governance. The aim of Pillar 3 is to allow market discipline to operate by requiring institutions to disclose details
on the scope of application, capital, risk exposures, risk assessment processes, and the capital adequacy of the
institution. It must be consistent with how the senior management, including the board, access and manage the
risks of the institution.
When market participants have a sufficient understanding of a bank's activities and the controls it has in place to
manage its exposures, they are better able to distinguish between banking organizations so that they can reward
those that manage their risks prudently and penalize those that do not.
These disclosures are required to be made at least twice a year, except qualitative disclosures providing a
summary of the general risk management objectives and policies which can be made annually. Institutions are
also required to create a formal policy on what will be disclosed and controls around them along with the
validation and frequency of these disclosures. In general, the disclosures under Pillar 3 apply to the top
consolidated level of the banking group to which the Basel II framework applies.

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Recent update
September 2005 update
On September 30, 2005, the four US Federal banking agencies (the Office of the Comptroller of the Currency,
the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, and the Office
of Thrift Supervision) announced their revised plans for the U.S. implementation of the Basel II accord. This
delays implementation of the accord for US banks by 12 months.

November 2005 update

On November 15, 2005, the committee released a revised version of the Accord, incorporating changes to the
calculations for market risk and the treatment of double default effects. These changes had been flagged well in
advance, as part of a paper released in July 2005.

July 2006 update

On July 4, 2006, the committee released a comprehensive version of the Accord, incorporating the June 2004 Basel
II Framework, the elements of the 1988 Accord that were not revised during the Basel II process, the 1996
Amendment to the Capital Accord to Incorporate Market Risks, and the November 2005 paper on Basel II:
International Convergence of Capital Measurement and Capital Standards: A Revised Framework. No new
elements have been introduced in this compilation. This version is now the current version.

November 2007 update

On November 1, 2007, the Office of the Comptroller of the Currency (U.S. Department of the Treasury) approved
a final rule implementing the advanced approaches of the Basel II Capital Accord. This rule establishes regulatory
and supervisory expectations for credit risk, through the Internal Ratings Based Approach (IRB), and operational
risk, through the Advanced Measurement Approach (AMA), and articulates enhanced standards for the
supervisory review of capital adequacy and public disclosures for the largest U.S. banks.

July 16, 2008 update

On July 16, 2008 the federal banking and thrift agencies (the Board of Governors of the Federal Reserve System,
the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, and the Office of Thrift
Supervision) issued a final guidance outlining the supervisory review process for the banking institutions that are
implementing the new advanced capital adequacy framework (known as Basel II). The final guidance, relating to
the supervisory review, is aimed at helping banking institutions meet certain qualification requirements in the
advanced approaches rule, which took effect on April 1, 2008.

January 16, 2009 update

For public consultation, a series of proposals to enhance the Basel II framework was announced by the Basel
Committee. It releases a consultative package that includes: the revisions to the Basel II market risk framework;
the guidelines for computing capital for incremental risk in the trading book; and the proposed enhancements to
the Basel II framework.

July 89, 2009 update

A final package of measures to enhance the three pillars of the Basel II framework and to strengthen the 1996
rules governing trading book capital was issued by the newly expanded Basel Committee. These measures
include the enhancements to the Basel II framework, the revisions to the Basel II market-risk framework and the
guidelines for computing capital for incremental risk in the trading book.

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Basel ii and the Regulator

One of the most difficult aspects of implementing an international agreement is the need to accommodate
differing cultures, varying structural models, complexities of public policy, and existing regulation. Banks' senior
management will determine corporate strategy, as well as the country in which to base a particular type of
business, based in part on how Basel II is ultimately interpreted by various countries' legislatures and regulators.
To assist banks operating with multiple reporting requirements for different regulators according to geographic
location, there are several software applications available. These include capital calculation engines and extend to
automated reporting solutions which include the reports required under COREP/FINREP.
For example, U.S. Federal Deposit Insurance Corporation Chair Sheila Bair explained in June 2007 the purpose of
capital adequacy requirements for banks, such as the accord:
There are strong reasons for believing that banks left to their own devices would maintain less capital
not morethan would be prudent. The fact is, banks do benefit from implicit and explicit government
safety nets. Investing in a bank is perceived as a safe bet. Without proper capital regulation, banks can
operate in the marketplace with little or no capital. And governments and deposit insurers end up
holding the bag, bearing much of the risk and cost of failure. History shows this problem is very real
as we saw with the U.S. banking and S & L crisis in the late 1980s and 1990s. The final bill for inadequate
capital regulation can be very heavy. In short, regulators can't leave capital decisions totally to the banks.
We wouldn't be doing our jobs or serving the public interest if we did.

Implementation progress
Regulators in most jurisdictions around the world plan to implement the new accord, but with widely
varying timelines and use of the varying methodologies being restricted. The United States' various
regulators have agreed on a final approach. They have required the Internal Ratings-Based approach for the
largest banks, and the standardized approach will be available for smaller banks.
In India, Reserve Bank of India has implemented the Basel II standardized norms on 31 March 2009 and is
moving to internal ratings in credit and AMA(Advanced Measurement Approach) norms for operational
risks in banks.
Existing RBI norms for banks in India (as of September 2010): Common equity (incl of buffer): 3.6%(Buffer
Basel 2 requirement requirements are zero.); Tier 1 requirement: 6%. Total Capital : 9% of risk weighted
assets.
According to the draft guidelines published by RBI the capital ratios are set to become: Common Equity as
5% + 2.5% (Capital Conservation Buffer) + 02.5% (Counter Cyclical Buffer), 7% of Tier 1 capital and
minimum capital adequacy ratio (excluding Capital Conservation Buffer) of 9% of Risk Weighted Assets.
Thus the actual capital requirement is between 11 and 13.5% (including Capital Conservation Buffer and
Counter Cyclical Buffer).[11]
In response to a questionnaire released by the Financial Stability Institute (FSI), 95 national regulators
indicated they were to implement Basel II, in some form or another, by 2015.

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The European Union has already implemented the Accord via the EU Capital Requirements Directives and
many European banks already report their capital adequacy ratios according to the new system. All the credit
institutions adopted it by 2008-09.
Australia, through its Australian Prudential Regulation Authority, implemented the Basel II Framework on
the 1st of January 2008.

BASEL II AND THE GLOBAL FINANCIAL CRISES

The role of Basel II, both before and after the global financial crisis, has been discussed widely. While some
argue that the crisis demonstrated weaknesses in the framework, others have criticized it for actually
increasing the effect of the crisis. In response to the financial crisis, the Basel Committee on Banking
Supervision published revised global standards, popularly known as Basel III. The Committee claimed that
the new standards would lead to a better quality of capital, increased coverage of risk for capital market
activities and better liquidity standards among other benefits.
Nout Wellink, former Chairman of the BCBS, wrote an article in September 2009 outlining some of the
strategic responses which the Committee should take as response to the crisis. He proposed a stronger
regulatory framework which comprises five key components: (a) better quality of regulatory capital, (b)
better liquidity management and supervision, (c) better risk management and supervision including
enhanced Pillar 2 guidelines, (d) enhanced Pillar 3 disclosures related to securitization, off-balance sheet
exposures and trading activities which would promote transparency, and (e) cross-border supervisory
cooperation. Given one of the major factors which drove the crisis was the evaporation of liquidity in the
financial markets, the BCBS also published principles for better liquidity management and supervision in
September 2008.
A recent OECD study suggest that bank regulation based on the Basel accords encourage unconventional
business practices and contributed to or even reinforced adverse systemic shocks that materialized during the
financial crisis. According to the study, capital regulation based on risk-weighted assets encourages
innovation designed to circumvent regulatory requirements and shifts banks' focus away from their core
economic functions. Tighter capital requirements based on risk-weighted assets, introduced in the Basel III,
may further contribute to these skewed incentives. New liquidity regulation, notwithstanding its good
intentions, is another likely candidate to increase bank incentives to exploit regulation.
Think-tanks such as the World Pensions Council (WPC) have also argued that European legislators have
pushed dogmatically and naively for the adoption of the Basel II recommendations, adopted in 2005,
transposed in European Union law through the Capital Requirements Directive (CRD), effective since 2008.
In essence, they forced private banks, central banks, and bank regulators to rely more on assessments
of credit risk by private rating agencies. Thus, part of the regulatory authority was abdicated in favor of
private rating agencies.
Long before the implementation of Basel II George W. Stroke and Martin H. Wiggers pointed out, that a
global financial and economic crisis will come, because of its systemic dependencies on a few rating agencies.
After the breakout of the crisis Alan Greenspan agreed to this opinion in 2007. At least the Financial Crisis
Inquiry Report confirmed this point of view in 2011.

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BASEL III (or the Third Basel Accord) is a global, voluntary regulatory standard on bank capital
adequacy, stress testing and market liquidity risk. It was agreed upon by the members of the Basel in 201011,
and was scheduled to be introduced from 2013 until 2015; however, changes from 1 April 2013 extended
implementation until 31 March 2018 and again extended to 31 March 2019. The third installment of the Basel
Accords (see Basel I, Basel II) was developed in response to the deficiencies in regulation revealed by the financial
crisis of 200708. Basel III was supposed to strengthen bank capital requirements by increasing bank liquidity and
decreasing bank leverage.

Capital requirements
The original Basel III rule from 2010 was supposed to require banks to hold 4.5% of common equity (up from 2%
in Basel II) and 6% of Tier I capital (including common equity and up from 4% in Basel II) of "risk-weighted
assets" (RWAs). Basel III introduced two additional "capital buffers"a "mandatory capital conservation buffer"
of 2.5% and a "discretionary counter-cyclical buffer" to allow national regulators to require up to an additional
2.5% of capital during periods of high credit growth.

Leverage ratio
Basel III introduced a minimum "leverage ratio". The leverage ratio was calculated by dividing Tier 1 capital by
the bank's average total consolidated assets (not risk weighted); The banks were expected to maintain a leverage
ratio in excess of 3% under Basel III. In July 2013, the U.S. Federal Reserve announced that the minimum Basel III
leverage ratio would be 6% for 8 Systemically important financial institution (SIFI) banks and 5% for their insured
bank holding companies.

Liquidity requirements
Basel III introduced two required liquidity ratios. The "Liquidity Coverage Ratio" was supposed to require a bank
to hold sufficient high-quality liquid assets to cover its total net cash outflows over 30 days; the Net Stable
Funding Ratio was to require the available amount of stable funding to exceed the required amount of stable
funding over a one-year period of extended stress.

U.S. version of the Basel Liquidity Coverage Ratio requirements

On 24 October 2013, the Federal Reserve Board of Governors approved an interagency proposal for the U.S.
version of the Basel Committee on Banking Supervision (BCBS)'s Liquidity Coverage Ratio (LCR). The ratio
would apply to certain U.S. banking organizations and other systematically important financial institutions. The
comment period for the proposal is scheduled to close by 31 January 2014.
The United States' LCR proposal came out significantly tougher than BCBSs version, especially for larger bank
holding companies. The proposal requires financial institutions and FSOC designated nonbank financial
companies to have an adequate stock of high-quality liquid assets (HQLA) that can be quickly liquidated to meet
liquidity needs over a short period of time.
The LCR consists of two parts: the numerator is the value of HQLA, and the denominator consists of the total net
cash outflows over a specified stress period (total expected cash outflows minus total expected cash inflows).
The Liquidity Coverage Ratio applies to U.S. banking operations with assets of more than $10 billion. The
proposal would require:

Large Bank Holding Companies (BHC) those with over $250 billion in consolidated assets, or more in onbalance sheet foreign exposure, and to systemically important, non-bank financial institutions; to hold

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enough HQLA to cover 30 days of net cash outflow. That amount would be determined based on the peak
cumulative amount within the 30-day period.
Regional firms (those with between $50 and $250 billion in assets) would be subject to a modified LCR at
the (BHC) level only. The modified LCR requires the regional firms to hold enough HQLA to cover 21 days
of net cash outflow. The net cash outflow parameters are 70% of those applicable to the larger institutions
and do not include the requirement to calculate the peak cumulative outflows.
Smaller BHCs, those under $50 billion, would remain subject to the prevailing qualitative supervisory
framework.

The U.S. proposal divides qualifying HQLAs into three specific categories (Level 1, Level 2A, and Level 2B).
Across the categories the combination of Level 2A and 2B assets cannot exceed 40% HQLA with 2B assets limited
to a maximum of 15% of HQLA.

Level 1 represents assets that are highly liquid (generally those risk-weighted at 0% under the Basel III
standardized approach for capital) and receive no haircut. Notably, the Fed chose not to include GSE-issued
securities in Level 1, despite industry lobbying, on the basis that they are not guaranteed by the "full faith
and credit" of the U.S. government.
Level 2A assets generally include assets that would be subject to a 20% risk-weighting under Basel III and
includes assets such as GSE-issued and -guaranteed securities. These assets would be subject to a
15% haircut which is similar to the treatment of such securities under the BCBS version.
Level 2B assets include corporate debt and equity securities and are subject to a 50% haircut. The BCBS and
U.S. version treats equities in a similar manner, but corporate debt under the BCBS version is split between
2A and 2B based on public credit ratings, unlike the U.S. proposal. This treatment of corporate debt securities
is the direct impact of the DoddFrank Act's Section 939, which removed references to credit ratings, and
further evidences the conservative bias of U.S. regulators approach to the LCR.

The proposal requires that the LCR be at least equal to or greater than 1.0 and includes a multiyear transition
period that would require: 80% compliance starting 1 January 2015, 90% compliance starting 1 January 2016, and
100% compliance starting 1 January 2017.
Lastly, the proposal requires both sets of firms (large bank holding companies and regional firms) subject to the
LCR requirements to submit remediation plans to U.S. regulators to address what actions would be taken if the
LCR falls below 100% for three or more consecutive days.

Implementation
Summary of originally (2010) proposed changes in Basel Committee language

First, the quality, consistency, and transparency of the capital base will be raised.
Tier 1 capital: the predominant form of Tier 1 capital must be common shares and retained earnings
Tier 2 capital: supplementary capital, however, the instruments will be harmonised
Tier 3 capital will be eliminated.[15]
Second, the risk coverage of the capital framework will be strengthened.
Promote more integrated management of market and counterparty credit risk
Add the credit valuation adjustmentrisk due to deterioration in counterparty's credit rating
Strengthen the capital requirements for counterparty credit exposures arising from banks' derivatives,
repo and securities financing transactions
Raise the capital buffers backing these exposures
Reduce procyclicality and

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Provide additional incentives to move OTC derivative contracts to qualifying central counterparties
(probably clearing houses). Currently, the BCBS has stated derivatives cleared with a QCCP will be riskweighted at 2% (The rule is still yet to be finalized in the U.S.)
Provide incentives to strengthen the risk management of counterparty credit exposures
Raise counterparty credit risk management standards by including wrong-way risk
Third, a leverage ratio will be introduced as a supplementary measure to the Basel II risk-based framework,
intended to achieve the following objectives:
Put a floor under the buildup of leverage in the banking sector
Introduce additional safeguards against model risk and measurement error by supplementing the
risk based measure with a simpler measure that is based on gross exposures.
Fourth, a series of measures is introduced to promote the buildup of capital buffers in good times that can be
drawn upon in periods of stress ("Reducing procyclicality and promoting countercyclical buffers").
Measures to address procyclicality:
Dampen excess cyclicality of the minimum capital requirement;
Promote more forward looking provisions;
Conserve capital to build buffers at individual banks and the banking sector that can be used in
stress; and
Achieve the broader macroprudential goal of protecting the banking sector from periods of excess credit
growth.
Requirement to use long term data horizons to estimate probabilities of default,
downturn loss-given-default estimates, recommended in Basel II, to become mandatory
Improved calibration of the risk functions, which convert loss estimates into regulatory capital
requirements.
Banks must conduct stress tests that include widening credit spreads in recessionary scenarios.
Promoting stronger provisioning practices (forward-looking provisioning):
Advocating a change in the accounting standards towards an expected loss (EL) approach
(usually, EL amount := LGD*PD*EAD).[16]
Fifth,a global minimum liquidity standard for internationally active banks is introduced that includes a 30day liquidity coverage ratio requirement underpinned by a longer-term structural liquidity ratio called
the Net Stable Funding Ratio. (In January 2012, the oversight panel of the Basel Committee on Banking
Supervision issued a statement saying that regulators will allow banks to dip below their required liquidity
levels, the liquidity coverage ratio, during periods of stress. [17])
The Committee also is reviewing the need for additional capital, liquidity or other supervisory measures to
reduce the externalities created by systemically important institutions.

As of September 2010, proposed Basel III norms asked for ratios as: 79.5% (4.5% + 2.5% (conservation buffer) + 0
2.5% (seasonal buffer)) for common equity and 8.511% for Tier 1 capital and 10.513% for total capital.[18]
On 15 April, the Basel Committee on Banking Supervision (BCBS) released the final version of its Supervisory
Framework for Measuring and Controlling Large Exposures (SFLE) that builds on longstanding BCBS guidance
on credit exposure concentrations.[19]
U.S. implementation
The U.S. Federal Reserve announced in December 2011 that it would implement substantially all of the Basel III
rules. It summarized them as follows, and made clear they would apply not only to banks but also to all
institutions with more than US$50 billion in assets:

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"Risk-based capital and leverage requirements" including first annual capital plans, conduct stress tests,
and capital adequacy "including a tier one common risk-based capital ratio greater than 5 percent, under both
expected and stressed conditions" see scenario analysis on this. A risk-based capital surcharge
Market liquidity, first based on the United States' own "interagency liquidity risk-management
guidance issued in March 2010" that require liquidity stress tests and set internal quantitative limits, later
moving to a full Basel III regime - see below.
The Federal Reserve Board itself would conduct tests annually "using three economic and financial market
scenarios". Institutions would be encouraged to use at least five scenarios reflecting improbable events, and
especially those considered impossible by management, but no standards apply yet to extreme scenarios.
Only a summary of the three official Fed scenarios "including company-specific information, would be made
public" but one or more internal company-run stress tests must be run each year with summaries published.
Single-counterparty credit limits to cut "credit exposure of a covered financial firm to a single counterparty as
a percentage of the firm's regulatory capital. Credit exposure between the largest financial companies would
be subject to a tighter limit".
"Early remediation requirements" to ensure that "financial weaknesses are addressed at an early stage". One
or more "triggers for remediationsuch as capital levels, stress test results, and risk-management
weaknessesin some cases calibrated to be forward-looking" would be proposed by the Board in 2012.
"Required actions would vary based on the severity of the situation, but could include restrictions on growth,
capital distributions, and executive compensation, as well as capital raising or asset sales".

As of January 2014, the United States has been on track to implement many of the Basel III rules, despite
differences in ratio requirements and calculations.

KEY MILESTONES
Capital requirements
Date Milestone: Capital requirement

2014

Minimum capital requirements: Start of the gradual phasing-in of the higher minimum capital
requirements.

2015 Minimum capital requirements: Higher minimum capital requirements are fully implemented.

2016 Conservation buffer: Start of the gradual phasing-in of the conservation buffer.

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2019 Conservation buffer: The conservation buffer is fully implemented.

Leverage ratio
Date Milestone: Leverage ratio

2011 Supervisory monitoring: Developing templates to track the leverage ratio and the underlying components.

2013

Parallel run I: The leverage ratio and its components will be tracked by supervisors but not disclosed and
not mandatory.

2015 Parallel run II: The leverage ratio and its components will be tracked and disclosed but not mandatory.

2017

Final adjustments: Based on the results of the parallel run period, any final adjustments to the leverage
ratio.

2018 Mandatory requirement: The leverage ratio will become a mandatory part of Basel III requirements.
Liquidity requirements[edit]
Date Milestone: Liquidity requirements

2011 Observation period: Developing templates and supervisory monitoring of the liquidity ratios.

2015

Introduction of the LCR: Initial introduction of the Liquidity Coverage Ratio (LCR), with a 60%
requirement. This will increase by ten percentage points each year until 2019.

2018 Introduction of the NSFR: Introduction of the Net Stable Funding Ratio (NSFR).

2019 LCR comes into full effect: 100% LCR is expected.

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Analysis on Basel III impact

Macroeconomic impact
An OECD study released on 17 February 2011, estimated that the medium-term impact of Basel III
implementation on GDP growth would be in the range of 0.05% to 0.15% per year. Economic output would be
mainly affected by an increase in bank lending spreads, as banks pass a rise in bank funding costs, due to higher
capital requirements, to their customers. To meet the capital requirements originally effective in 2015 banks were
estimated to increase their lending spreads on average by about 15 basis points. Capital requirements effective as
of 2019 (7% for the common equity ratio, 8.5% for the Tier 1 capital ratio) could increase bank lending spreads by
about 50 basis points. The estimated effects on GDP growth assume no active response from monetary policy. To
the extent that monetary policy would no longer be constrained by the zero lower bound, the Basel III impact on
economic output could be offset by a reduction (or delayed increase) in monetary policy rates by about 30 to
80 basis points.

CRITICISM
Think tanks such as the World Pensions Council have argued that Basel III merely builds on and further expands
the existing Basel II regulatory base without fundamentally questioning its core tenets, notably the ever-growing
reliance on standardized assessments of "credit risk" marketed by two private sector agencies- Moody's and S&P,
thus using public policy to strengthenanti-competitive duopolistic practices.
Basel III has also been criticized by banks, organized in the Institute of International Finance, an international
association of global banks based in Washington, D.C., who argue that it would hurt them and economic growth.
The OECD estimated that implementation of Basel III would decrease annual GDP growth by 0.05
0.15%, blaming the slow recovery from the financial crisis of 200708 on the regulation. Basel III was also
criticized as negatively affecting the stability of the financial system by increasing incentives of banks to game the
regulatory framework. The American Bankers Association, community banks organized in the Independent
Community Bankers of America, and some of the most liberal Democrats in the U.S. Congress, including the
entire Maryland congressional delegation with Democratic Senators Ben Cardin and Barbara Mikulski and
Representatives Chris Van Hollen and Elijah Cummings, voiced opposition to Basel III in their comments to
the Federal Deposit Insurance Corporation, saying that the Basel III proposals, if implemented, would hurt small
banks by increasing "their capital holdings dramatically on mortgage and small business loans".
Others have argued that Basel III did not go far enough to regulate banks as inadequate regulation was a cause of
the financial crisis. On 6 January 2013 the global banking sector won a significant easing of Basel III Rules, when
the Basel Committee on Banking Supervision extended not only the implementation schedule to 2019, but
broadened the definition of liquid assets.

FURTHER STUDIES
In addition to articles used for references (see References), this section lists links to publicly available high-quality
studies on Basel III. This section may be updated frequently as Basel III remains under development.
Date Source

Feb

BNP Paribas Fortis

Article Title / Link

Basel

III

for

Comments

dummies "All you need to know about Basel III in 10 minutes." Updated

Page 13 of 14

2012

Video

for 6 January 2013 decisions.

Dec
2011

OECD: Economics Systemically

Department
Banks

Jun
2011

BNP
Paribas:
Economic
Basel III: no Achilles' BNP Paribas' Economic Research Department study on
Research
spear
Basel III.
Department

Feb
2011

Georg, co-Pierre

Basel III and Systemic

An overview article of Basel III with a focus on how to
Risk Regulation What
regulate systemic risk.
Way Forward?

Feb
2011

OECD: Economics Macroeconomic

Department
of Basel III

May
2010

OECD
Journal:
Thinking Beyond Basel
Financial Market
OECD study on Basel I, Basel II and III.
III
Trends

May
2010

Bloomberg
Businessweek

Bair said regulators around the world need to work

FDIC's Bair Says Europe
together on the next round of capital standards for banks ...
Should Make Banks Hold
the next round of international standards, known as Basel
More Capital
III, which Bair said must meet "very aggressive" goals.

Reuters

Finance ministers from the G20 group of industrial and

FACTBOX-G20 progress emerging countries meet in Busan, Korea, on 45 June to
on financial regulation
review pledges made in 2009 to strengthen regulation and
learn lessons from the financial crisis.

The Economist

"The most important bit of reform is the international set of rules

The banks battle back
known as "Basel 3", which will govern the capital and liquidity
A
behind-the-scenes
buffers banks carry. It is here that the most vicious and least
brawl over new capital
public skirmish between banks and their regulators is taking
and liquidity rules
place."

May
2010

May
2010

Important OECD analysis on the failure of bank regulation and

markets to discipline systemically important banks.

Impact

OECD analysis on the macroeconomic impact of Basel III.

Page 14 of 14