Basel III
Basel III is an international regulatory framework developed by the Basel Committee on Banking Supervision that establishes minimum capital, liquidity, and leverage standards for banks to strengthen the global financial system.
Basel III is the third edition of the Basel Accords — a set of internationally agreed bank regulatory standards developed by the Basel Committee on Banking Supervision (BCBS), which operates under the auspices of the Bank for International Settlements (BIS) in Basel, Switzerland. The framework was developed in response to the deficiencies exposed by the 2008 financial crisis, when many globally active banks were found to hold insufficient capital relative to the risks they had taken, and where short-term funding structures proved fragile when market liquidity evaporated.
The centerpiece of Basel III is the Common Equity Tier 1 (CET1) capital requirement. CET1 consists of the highest quality capital — primarily retained earnings and issued common shares — and serves as the first line of defense against losses. Under Basel III, banks must maintain a minimum CET1 ratio of 4.5% of risk-weighted assets, plus a capital conservation buffer of 2.5%, for an effective minimum of 7%. Systemically important banks face additional surcharges of up to 3.5%, reflecting their potential impact on the broader financial system.
Basel III introduced two new liquidity standards. The Liquidity Coverage Ratio (LCR) requires banks to hold enough high-quality liquid assets (HQLA) — primarily cash and government securities — to survive a severe 30-day funding stress scenario. The Net Stable Funding Ratio (NSFR) requires banks to maintain a stable long-term funding profile relative to the liquidity characteristics of their assets, discouraging excessive reliance on short-term wholesale funding.
A leverage ratio was added as a non-risk-based backstop, requiring banks to maintain Tier 1 capital of at least 3% of total (unweighted) exposures, regardless of how risk models assess the underlying assets. This provision was designed to limit overall leverage regardless of how well the risk-weighted framework performed.
In the United States, Basel III standards are implemented through rulemaking by the OCC, FDIC, and Federal Reserve. The final 'Basel III endgame' rules — revising how banks calculate risk-weighted assets — have been subject to extensive debate and revision. For investors, Basel III shapes banks' profitability (higher capital requirements reduce return on equity), dividend and buyback capacity, and their ability to grow loan books.