Basel III/IV Capital and Liquidity Framework
Comprehensive overview of the Basel III/IV regulatory framework for bank capital adequacy, liquidity, and leverage requirements.
Basel III/IV Framework Overview
Background
Basel III was introduced in response to the 2008 financial crisis to strengthen bank capital requirements and introduce new regulatory requirements on bank liquidity and leverage.
Capital Requirements
Common Equity Tier 1 (CET1)
- Minimum 4.5% of risk-weighted assets (RWA)
- Highest quality capital (common shares, retained earnings)
Tier 1 Capital
- Minimum 6% of RWA
- CET1 plus Additional Tier 1 (AT1) instruments
Total Capital
- Minimum 8% of RWA
- Tier 1 plus Tier 2 capital
Capital Buffers
| Buffer | Requirement | |--------|-------------| | Capital Conservation | 2.5% CET1 | | Countercyclical | 0-2.5% CET1 | | G-SIB/D-SIB | 1-3.5% CET1 |
Liquidity Requirements
Liquidity Coverage Ratio (LCR)
- Stock of high-quality liquid assets (HQLA)
- Divided by total net cash outflows over 30 days
- Minimum 100%
Net Stable Funding Ratio (NSFR)
- Available stable funding
- Divided by required stable funding
- Minimum 100%
- Addresses longer-term structural liquidity
Leverage Ratio
- Tier 1 capital divided by total exposure
- Minimum 3% (higher for G-SIBs)
- Non-risk-based backstop
Basel IV Refinements
- Revised standardized approaches
- Output floor (72.5% of standardized RWA)
- Revised operational risk framework
- Credit valuation adjustment (CVA) updates
Implementation Timeline
- Basel III: Phased in 2013-2019
- Basel IV: Implementation 2023-2028