Basel III: An overview of micro and macro prudential regulatoryrequirements for banks
"Basel III" is a comprehensive set of reform measures, developed by theBasel Committee on Banking Supervision, to strengthen the regulation,supervision and risk management of the banking sector. These measures aimto:1. improve the banking sector's ability to absorb shocks arising fromfinancial and economic stress, whatever the source2. improve risk management and governance3. strengthen banks' transparency and disclosures.The reforms target both micro and macro prudential regulation.
Micro Prudential Regulation
At bank-level, or microprudential, regulation, they will help raise the resilienceof individual banking institutions to periods of stress. Practically, these reformsmean:A significant increase in risk coverage, with a focus on areas that were mostproblematic during the crisis, that is trading book exposures, counterpartycredit risk, and securitisation activities;A fundamental tightening of the definition of capital, with a strong focus oncommon equity. At the same time, this represents a move away from complexhybrid instruments, which did not prove to be loss absorbing in periods ofstress. We also introduced requirements that all capital instruments mustabsorb losses at the point of non-viability, which was not the case in the crisis;