Basel III

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The Basel Committee on Banking Supervision
Founded 1974
Headquarters Basel, Switzerland
Web site www.bis.org

Basel III was introduced by the Basel Committee on Banking Supervision in December 2010.[1] It is the third iteration of the 1974 Basel Accord, a set of international supervisory standards and best practices designed to promote global harmonization of banking standards.[2]

Background

In 1988, the Basel Committee introduced the original accord, in which members agreed to an eight percent capital reserve requirement as a credit risk buffer. In 2004, Basel II was introduced, which added to the original accord's credit risk assessment to require members to also monitor systemic, concentration, and liquidity risks. Capital requirements, risk management and supervision, and market discipline are known as "The Three Pillars" of Basel II.[3]

Summary of Basel III

In response to the financial crisis of 2008, the committee decided to augment the three pillars that made up the Basel II framework. Changes include:

  • a greater focus on common equity (must be at least seven percent),
  • required Tier 1 capital moves from four to six percent,
  • expanded corporate governance requirements, and
  • loss-absorbency requirements for global systemically important banks (G-SIBs).[4]

Higher capital requirements for the trading of derivatives and securitizations are expected by the end of 2011. Requirements for common equity and conservation buffers will be phased in beginning January 1, 2013.[5]

References

  1. International Convergence of Capital Measurement and Capital Standards. Bank for International Settlements.
  2. History of the Basel Committee and its Membership. Bank for International Settlements.
  3. International Convergence of Capital Measurement and Capital Standards. Bank for International Settlements.
  4. Basel III Summary – Guide to the changes. Basel II Risk.
  5. New Basel III Common Equity % by Year. Basel II Risk.