INTRODUCTION

Basel III is the third Basel Accord, a framework that sets international standards for bank capital
adequacy, stress testing, and liquidity requirements. Augmenting and superseding parts of the Basel
II standards, it was developed in response to the deficiencies in financial regulation revealed by the
financial crisis of 2007–08. It is intended to strengthen bank capital requirements by increasing
minimum capital requirements, holdings of high quality liquid assets, and decreasing bank leverage.

The financial crisis of 2007-2008 exposed weaknesses in the banking sector and regulatory
oversight. Many banks had insufficient capital to cover their losses, leading to government bailouts
and severe economic consequences. In the aftermath of this crisis, there was a need for stronger
banking regulations to prevent a similar catastrophe.

Basel III was published by the Basel Committee on Banking Supervision in November 2010, and
was scheduled to be introduced from 2013 until 2015; however, implementation was extended
repeatedly to 1 January 2022 and then again until 1 January 2023, in the wake of the COVID-19
pandemic.

Basel III aims to strengthen the requirements in the Basel II regulatory standards for banks. In
addition to increasing capital requirements, it introduces requirements on liquid asset holdings and
funding stability, thereby seeking to mitigate the risk of a run on the bank.

Objectives Of BASEL III

1. Strengthening Capital Adequacy: Basel III aims to ensure that banks maintain sufficient
capital to absorb losses during periods of financial stress. It introduces more rigorous
definitions of capital and higher minimum capital requirements. Common Equity Tier 1
(CET1) capital, considered the highest-quality capital, is emphasized.

2. Enhancing Risk Management: The framework promotes better risk management practices
within banks. It encourages banks to have robust risk assessment and measurement systems
in place to identify, monitor, and manage risks effectively.

3. Improving Liquidity Management: Basel III introduces liquidity requirements to ensure that
banks have enough high-quality liquid assets to meet their short-term funding needs, even
during times of financial turmoil. The Liquidity Coverage Ratio (LCR) and Net Stable
Funding Ratio (NSFR) are key components of these liquidity standards.

4. Reducing Systemic Risk: By strengthening capital and liquidity requirements, Basel III aims
to reduce the risk of financial institutions becoming insolvent and triggering broader
systemic crises. It seeks to minimize the domino effect of bank failures, which can have
severe consequences for the entire financial system.

5. Promoting International Consistency: Basel III encourages consistency in banking

regulations and supervision across countries. This helps prevent regulatory arbitrage, where
banks might exploit differences in regulations to their advantage, and contributes to a level
playing field for global banks.
Key Components:
 Common Equity Tier 1 (CET1) Capital: Basel III introduces stricter definitions of what
qualifies as high-quality capital and increases the minimum CET1 capital requirement.
 Capital Conservation Buffer: Banks are required to maintain an additional buffer of capital
to withstand future stress situations.
 Leverage Ratio: It sets a limit on the ratio of a bank's Tier 1 capital to its average total
consolidated assets.
 Liquidity Coverage Ratio (LCR): Banks must hold enough high-quality liquid assets to
cover their short-term funding needs during a 30-day stress scenario.
 Net Stable Funding Ratio (NSFR): This ratio ensures that banks have a stable funding
structure over a longer time horizon.

PILLARS OF BASEL III

Basel III is an international regulatory framework for banking supervision developed by the Basel
Committee on Banking Supervision (BCBS). It is built upon three primary pillars, each addressing
different aspects of banking supervision and risk management. Here's an explanation of the three
pillars of Basel III:

Pillar 1: Minimum Capital Requirements:

Objective: The primary goal of Pillar 1 is to establish minimum capital requirements to ensure
that banks maintain an adequate level of capital to cover their risks.
Key Components:

A. Common Equity Tier 1 (CET1) Capital: Basel III emphasizes the importance of CET1 capital,
which includes common shares and retained earnings. It sets a higher minimum requirement for
CET1 capital, ensuring that it forms the core of a bank's regulatory capital.

B. Additional Tier 1 (AT1) Capital and Tier 2 Capital: Basel III defines specific capital
instruments that can be classified as AT1 and Tier 2 capital, but these have stricter criteria to qualify
as regulatory capital compared to previous Basel agreements.

C. Risk-Based Capital Ratios: Banks are required to calculate risk-weighted assets (RWAs) based
on the level of risk associated with their assets and exposures. Basel III maintains several key
capital ratios, including the CET1 capital ratio, Tier 1 capital ratio, and Total Capital Ratio, all
expressed as percentages of RWAs.

D. Counterparty Credit Risk: Basel III introduces enhanced risk management standards for
counterparty credit risk, particularly for derivatives transactions, and provides options for banks to
use standardized approaches or advanced models to calculate capital requirements.

Pillar 2: Supervisory Review Process (SREP):

Objective: Pillar 2 focuses on the supervisory assessment of a bank's overall risk profile and its
internal capital adequacy assessment process (ICAAP). It aims to ensure that banks have sufficient
capital to cover their specific risk profiles.

Key Components:

A. Risk Assessment: Banking regulators conduct a comprehensive assessment of a bank's risk

profile, taking into account quantitative and qualitative factors. This assessment includes evaluating
the bank's governance, risk management practices, and business strategies.

B. ICAAP: Basel III requires banks to develop and maintain an internal assessment of capital
adequacy (ICAAP). Regulators review the ICAAP to ensure that it aligns with the bank's risk
profile and capital needs.

C. Supervisory Actions: Regulators have the authority to take various supervisory actions based on
their risk assessments and the results of the ICAAP. These actions may include requiring banks to
hold additional capital buffers or take specific risk mitigation measures.

D. Stress Testing: Stress testing is a crucial component of Pillar 2. Banks are required to conduct
stress tests to assess their resilience under adverse economic conditions.

Pillar 3: Market Discipline and Disclosure:

Objective: Pillar 3 seeks to enhance market discipline and transparency by requiring banks to
provide comprehensive and consistent information to the public and market participants.

Key Components:
A. Public Disclosure: Banks are obligated to disclose information about their risk profile,
capital adequacy, and risk management practices to promote transparency. This information helps
investors, creditors, and counterparties make informed decisions.

B. Market Discipline: By providing detailed information, Pillar 3 encourages market

participants to exert market discipline. Investors and counterparties can assess a bank's risk profile
and financial health, which can influence their decisions.

C. Disclosure Requirements: Basel III sets out specific disclosure requirements, including
details on capital adequacy, risk exposures, risk management policies, and the composition of
capital.

CONCLUSION:
In conclusion, Basel III represents a significant milestone in international banking regulation,
developed by the Basel Committee on Banking Supervision (BCBS) in response to the global
financial crisis of 2007-2008. This regulatory framework is built on three pillars, each addressing
crucial aspects of banking supervision and risk management.
Pillar 1 focuses on establishing minimum capital requirements, emphasizing the importance of
high-quality Common Equity Tier 1 (CET1) capital and introducing stricter criteria for Additional
Tier 1 (AT1) and Tier 2 capital. It also maintains risk-based capital ratios and enhances risk
management standards for counterparty credit risk.

Pillar 2, known as the Supervisory Review Process (SREP), ensures that banks have sufficient
capital to cover their specific risk profiles. It involves a comprehensive risk assessment by
regulators, a requirement for banks to develop an internal capital adequacy assessment process
(ICAAP), and the authority for regulators to take supervisory actions based on their assessments.

Pillar 3 promotes market discipline and transparency by requiring banks to provide detailed and
consistent information to the public and market participants. This disclosure helps investors,
creditors, and counterparties make informed decisions and fosters transparency within the banking
industry.

Basel III's overarching objectives are to strengthen the stability and resilience of the global banking
system, reduce the risk of financial crises, and protect the broader economy from banking sector
instability. While the implementation of Basel III has required banks to raise additional capital,
improve risk management practices, and adapt to new regulations, it ultimately aims to create a
more robust and transparent banking system.

However, it's important to note that Basel III is not a one-size-fits-all solution, and its
implementation may vary from one jurisdiction to another to accommodate specific national
banking systems and conditions. Nevertheless, the framework