Basel III
An international regulatory framework setting minimum capital, leverage, and liquidity requirements for banks.
What is Basel III?
Basel III is the third iteration of the Basel Accords — international banking supervision standards developed by the Basel Committee on Banking Supervision at the Bank for International Settlements (BIS). Finalized after the 2008 financial crisis, Basel III strengthened bank capital requirements, introduced leverage ratios, and added new liquidity requirements: the Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR). Key capital requirements include a minimum Common Equity Tier 1 (CET1) ratio of 4.5% of risk-weighted assets, plus buffers. The standards aim to ensure banks maintain sufficient capital to absorb losses without government bailouts. Basel III is implemented through national legislation — in the US through bank capital regulations; 'Basel IV' (technically Basel III final reforms) began implementation in 2023.
Example
During the 2008 crisis, many major banks had equity capital ratios of only 2–3%, meaning they could only absorb small losses before becoming insolvent. Basel III raised the minimum CET1 ratio to 4.5% plus a 2.5% capital conservation buffer (effective minimum of 7%), substantially reducing leverage at large banks. By 2023, major US banks held CET1 ratios of 12–15%, far exceeding the minimum.
Source: Bank for International Settlements — Basel III Standards