Basel III.
In plain English
Basel III is an agreement from the Basel Committee on Banking Supervision that raises how much loss-absorbing capital a bank must hold against its risk-weighted assets and adds rules for holding liquid assets. It sets minimum ratios, extra buffers that can be built up in good times and drawn down in bad ones, a simple leverage ratio that ignores risk weights, and liquidity standards for both short-term stress and longer-term funding. The committee has no legal power of its own, so each country writes the standards into its own rules and can go further. The exact minimum percentages come from the issuing regulators rather than from any fixed constant. Implementation has been phased in over many years.
01Why it matters
Higher capital and liquidity requirements make a bank failure less likely and a rescue less necessary, and they also raise the cost of lending, which shows up in loan pricing and in who gets approved.
02The math, step by step
Say a bank holds $10 billion of core capital against $125 billion of risk-weighted assets, an 8 percent ratio. If a regulator adds a 2.5 percentage point buffer on top of a 4.5 percent minimum, the requirement is 7 percent and the bank has $1.25 billion of headroom.
Illustrative example. The amounts here are hypothetical, chosen to show how the math works, not real quoted rates or figures.
03What this is NOT
Basel III is an international standard, not binding legislation. It becomes enforceable only when a national regulator writes it into rules, and countries differ on timing, scope, and which banks are covered.
04Receipts
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