The Basel iii Accord

Basel III is a comprehensive set of reform measures, developed by the Basel Committee on Banking Supervision, to strengthen the
regulation, supervision and risk of the banking sector.

The Basel Committee is the primary global standard-setter for the prudential regulation of banks and provides a forum for
cooperation on banking supervisory matters. Its mandate is to strengthen the regulation, supervision and practices of banks
worldwide with the purpose of enhancing financial stability.

The Committee reports to the Group of Governors and Heads of Supervision (GHOS). The Committee seeks the endorsement of
GHOS for its major decisions and its work programme.

The Committee's members come from Argentina, Australia, Belgium, Brazil, Canada, China, European Union, France, Germany,
Hong Kong SAR, India, Indonesia, Italy, Japan, Korea, Luxembourg, Mexico, the Netherlands, Russia, Saudi Arabia, Singapore,
South Africa, Spain, Sweden, Switzerland, Turkey, the United Kingdom and the United States.

The Basel III reform measures aim to:

1. Improve the banking sector's ability to absorb shocks arising from financial and economic stress, whatever the source
2. Improve risk management and governance
3. Strengthen banks' transparency and disclosures.
The reforms target:

A. Bank-level, or micro prudential, regulation, which will help raise the resilience of individual banking institutions to periods of
stress.

B. Macro prudential, system wide risks that can build up across the banking sector as well as the procyclical amplification of these
risks over time.

These two approaches to supervision are complementary as greater resilience at the individual bank level reduces the risk of system
wide shocks.

From 1993 to 2008 the total assets of a sample of what we call global systemically important banks saw twelve-fold increase
(increasing from $2.6 trillion to just over $30 trillion). But the capital funding these assets only increased seven-fold, (from $125
billion to $890 billion). Put differently, the average risk weight declined from 70% to below 40%.

The problem was that this reduction did not represent a genuine reduction in risk in the banking system.

One of the main reasons the economic and financial crisis became so severe was that the banking sectors of many countries
had built up excessive on and off-balance sheet leverage. This was accompanied by a gradual erosion of the level and quality of the
capital base.

At the same time, many banks were holding insufficient liquidity buffers.

The banking system therefore was not able to absorb the resulting systemic trading and credit losses nor could it cope with the
reintermediation of large off-balance sheet exposures that had built up in the shadow banking system.

The crisis was further amplified by a procyclical deleveraging process and by the interconnectedness of systemic institutions
through an array of complex transactions.

During the most severe episode of the crisis, the market lost confidence in the solvency and liquidity of many banking institutions.
The weaknesses in the banking sector were rapidly transmitted to the rest of the financial system and the real economy, resulting in
a massive contraction of liquidity and credit availability.

Ultimately the public sector had to step in with unprecedented injections of liquidity, capital support and guarantees, exposing
taxpayers to large losses.

The effect on banks, financial systems and economies at the epicentre of the crisis was immediate. However, the crisis also spread to
a wider circle of countries around the globe. For these countries the transmission channels were less direct, resulting from a severe
contraction in global liquidity, cross-border credit availability and demand for exports.

Given the scope and speed with which the recent and previous crises have been transmitted around the globe as well as the
unpredictable nature of future crises, it is critical that all countries raise the resilience of their banking sectors to both internal and
external shocks.

The G20 Leaders at the Seoul Summit endorsed the Basel III framework and the Financial Stability Boards (FSB) policy framework
for reducing the moral hazard of systemically important financial institutions (SIFIs), including the work processes and timelines
set out in the report submitted to the Summit.

SIFIs are financial institutions whose disorderly failure, because of their size, complexity and systemic interconnectedness, would
cause significant disruption to the wider financial system and economic activity.

We read in the final G20 Communique:

"We endorsed the landmark agreement reached by the Basel Committee on the new bank capital and liquidity framework, which
increases the resilience of the global banking system by raising the quality, quantity and international consistency of bank capital
and liquidity, constrains the build-up of leverage and maturity mismatches, and introduces capital buffers above the minimum
requirements that can be drawn upon in bad times.

The framework includes an internationally harmonized leverage ratio to serve as a backstop to the risk-based capital measures.

With this, we have achieved far-reaching reform of the global banking system.

The new standards will markedly reduce banks' incentive to take excessive risks, lower the likelihood and severity of future crises,
and enable banks to withstand - without extraordinary government support - stresses of a magnitude associated with the recent
financial crisis.

This will result in a banking system that can better support stable economic growth.

We are committed to adopt and implement fully these standards within the agreed timeframe that is consistent with economic
recovery and financial stability.

The new framework will be translated into our national laws and regulations, and will be implemented starting on January 1, 2013
and fully phased in by January 1, 2019."

To ensure visibility of the implementation of reforms, the Basel Committee has been regularly publishing information about
members adoption of Basel III to keep all stakeholders and the markets informed, and to maintain peer pressure where necessary.

It is especially important that jurisdictions that are home to global systemically important banks (G-SIBs) make every effort to issue
final regulations at the earliest possible opportunity.

But simply issuing domestic rules is not enough to achieve what the G20 Leaders asked for: full, timely and consistent
implementation of Basel III. In response to this call, in 2012 the Committee initiated what has become known as the Regulatory
Consistency Assessment Programme (RCAP).

The regular progress reports are simply one part of this programme, which assesses domestic regulations compliance with the
Basel standards, and examines the outcomes at individual banks.

The RCAP process will be fundamental to ensuring confidence in regulatory ratios and promoting a level playing field for
internationally-operating banks.

It is inevitable that, as the Committee begins to review aspects of the regulatory framework in far more detail than it (or anyone
else) has ever done in the past, there will be aspects of implementation that do not meet the G20s aspiration: full, timely and
consistent.

The financial crisis identified that, like the standards themselves, implementation of global standards was not as robust as it should
have been.

This could be classed as a failure by global standard setters.

To some extent, the criticism can be justified not enough has been done in the past to ensure global agreements have been truly
implemented by national authorities.

However, just as the Committee has been determined to revise the Basel framework to fix the problems that emerged from the
lessons of the crisis, the RCAP should be seen as demonstrating the Committees determination to also find implementation
problems and fix them.

What is Basel iii or What is Basel 3 Accord or Meaning and Definition of Basel III Accord:Basel III or Basel 3 released in December, 2010 is the third in the series of Basel Accords. These accords deal with risk management
aspects for the banking sector. In a nut shell we can say that Basel iii is the global regulatory standard (agreed upon by the members of
the Basel Committee on Banking Supervision) on bank capital adequacy, stress testing and market liquidity risk. (Basel I and Basel II
are the earlier versions of the same, and were less stringent)
What does Basel III is all About ?
According to Basel Committee on Banking Supervision "Basel III is a comprehensive set of reform measures, developed by the Basel
Committee on Banking Supervision, to strengthen the regulation, supervision and risk management of the banking sector".
Thus, we can say that Basel 3 is only a continuation of effort initiated by the Basel Committee on Banking Supervision to enhance the
banking regulatory framework under Basel I and Basel II. This latest Accord now seeks to improve the banking sector's ability to deal
with financial and economic stress, improve risk management and strengthen the banks' transparency.

What are the objectives / aims of the Basel III measures ?

Basel 3 measures aim to:

improve the banking sector's ability to absorb shocks arising from financial and economic stress, whatever the source

improve risk management and governance

strengthen banks' transparency and disclosures.

Thus we can say that Basel III guidelines are aimed at to improve the ability of banks to withstand periods of economic and financial
stress as the new guidelines are more stringent than the earlier requirements for capital and liquidity in the banking sector.

How Does Basel III Requirements Will Affect Indian Banks :

The Basel III which is to be implemented by banks in India as per the guidelines issued by RBI from time to time, will be challenging
task not only for the banks but also for GOI. It is estimated that Indian banks will be required to rais Rs 6,00,000 crores in external
capital in next nine years or so i.e. by 2020 (The estimates vary from organisation to organisation). Expansion of capital to this extent
will affect the returns on the equity of these banks specially public sector banks. However, only consolation for Indian banks is the fact
that historically they have maintained their core and overall capital well in excess of the regulatory minimum.

What are Three Pillars of Basel II Norms or What are the changes in Three Pillars of Basel iii Accord ?
Basel III: Three Pillars Still Standing :
Any one who has ever heard about Basel I and II, is most likely must have heard about Three Pillars of Basel. Three Pillar of Basel still
stand under Basel 3.
Basel III has essentially been designed to address the weaknesses that become too obvious during the 2008 financial crisis world faced.
The intent of the Basel Committee seems to prepare the banking industry for any future economic downturns.. The framework
enhances bank-specific measures and includes macro-prudential regulations to help create a more stable banking sector.

The basic structure of Basel III remains unchanged with three mutually reinforcing pillars.
Pillar 1 : Minimum Regulatory Capital Requirements based on Risk Weighted Assets (RWAs) : Maintaining capital calculated through
credit, market and operational risk areas.
Pillar 2 : Supervisory Review Process : Regulating tools and frameworks for dealing with peripheral risks that banks face.
Pillar 3: Market Discipline : Increasing the disclosures that banks must provide to increase the transparency of banks

What are the Major Changes Proposed in Basel III over earlier Accords i.e. Basel I and Basel II?
What are the Major Features of Basel III ?
(a) Better Capital Quality : One of the key elements of Basel 3 is the introduction of much stricter definition of capital. Better quality
capital means the higher loss-absorbing capacity. This in turn will mean that banks will be stronger, allowing them to better withstand
periods of stress.
(b) Capital Conservation Buffer: Another key feature of Basel iii is that now banks will be required to hold a capital conservation
buffer of 2.5%. The aim of asking to build conservation buffer is to ensure that banks maintain a cushion of capital that can be used to
absorb losses during periods of financial and economic stress.
(c) Countercyclical Buffer: This is also one of the key elements of Basel III. The countercyclical buffer has been introducted with the
objective to increase capital requirements in good times and decrease the same in bad times. The buffer will slow banking activity when
it overheats and will encourage lending when times are tough i.e. in bad times. The buffer will range from 0% to 2.5%, consisting of
common equity or other fully loss-absorbing capital.
(d) Minimum Common Equity and Tier 1 Capital Requirements : The minimum requirement for common equity, the highest form of
loss-absorbing capital, has been raised under Basel III from 2% to 4.5% of total risk-weighted assets. The overall Tier 1 capital
requirement, consisting of not only common equity but also other qualifying financial instruments, will also increase from the current
minimum of 4% to 6%. Although the minimum total capital requirement will remain at the current 8% level, yet the required total
capital will increase to 10.5% when combined with the conservation buffer.

(e) Leverage Ratio:

A review of the financial crisis of 2008 has indicted that the value of many assets fell quicker than assumed from

historical experience. Thus, now Basel III rules include a leverage ratio to serve as a safety net. A leverage ratio is the relative amount
of capital to total assets (not risk-weighted). This aims to put a cap on swelling of leverage in the banking sector on a global basis. 3%
leverage ratio of Tier 1 will be tested before a mandatory leverage ratio is introduced in January 2018.
(f) Liquidity Ratios: Under Basel III, a framework for liquidity risk management will be created. A new Liquidity Coverage Ratio
(LCR) and Net Stable Funding Ratio (NSFR) are to be introduced in 2015 and 2018, respectively.
(g) Systemically Important Financial Institutions (SIFI) : As part of the macro-prudential framework, systemically important banks will
be expected to have loss-absorbing capability beyond the Basel III requirements. Options for implementation include capital surcharges,
contingent capital and bail-in-debt.

Comparison of Capital Requirements under Basel II and Basel III :

Requirements
Minimum Ratio of Total Capital To RWAs

Under
Basel
II

Under Basel III

8%

10.50%

Minimum Ratio of Common Equity to

2%
RWAs

4.50% to 7.00%

Tier I capital to RWAs

4%

6.00%

Core Tier I capital to RWAs

2%

5.00%

Capital Conservation Buffers to RWAs

None

2.50%

Leverage Ratio

None

3.00%

Countercyclical Buffer

None

0% to 2.50%

Minimum Liquidity Coverage Ratio

None

TBD (2015)

Minimum Net Stable Funding Ratio

None

TBD (2018)

Systemically
important
Institutions Charge

None

TBD (2011)

Financial