Basel III is an internationally agreed set of measures developed by the Basel Committee on Banking Supervision in response to the financial crisis of The measures aim to strengthen the regulation, supervision and risk management of banks.
Like all Basel Committee standards, Basel III standards are minimum requirements which apply to internationally active banks. Members are committed to implementing and applying standards in their jurisdictions within the time frame established by the Committee. The revised standards will make banks more resilient and restore confidence in banking systems. This website requires javascript for proper use.
Systematically important banks are subject to higher capital requirements. Basel III likewise introduced leverage and liquidity requirements aimed at safeguarding against excessive borrowing, while ensuring that banks have sufficient liquidity during periods of financial stress. International Markets. Financial Ratios. Risk Management. Your Privacy Rights. To change or withdraw your consent choices for Investopedia. At any time, you can update your settings through the "EU Privacy" link at the bottom of any page.
These choices will be signaled globally to our partners and will not affect browsing data. We and our partners process data to: Actively scan device characteristics for identification. I Accept Show Purposes. Your Money. Personal Finance. Your Practice. Popular Courses. Economics Macroeconomics. Key Takeaways Basel III is a set of international banking regulations developed by the Bank for International Settlements to promote stability in the international financial system.
The effect of Basel III on stock markets is uncertain although it is likely that increased banking regulation will be positive for bond market investors. The ultimate impact of Basel III will depend upon how it is implemented in the future, but the ideal situation is an overall safer international financial system.
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Related Articles. Banking How Basel 1 Affected Banks. Federal Reserve U. Treasury vs. Partner Links. Related Terms Basel Accord The Basel Accord is a set of agreements on banking regulations concerning capital risk, market risk, and operational risk.
Bank for International Settlements BIS Definition The Bank for International Settlements is an international financial institution that aims to promote global monetary and financial stability. A capital conservation buffer, that is, entities must have resources and reserves constantly, both in cycles of economic growth and in adverse situations or recession.
Effective measures to avoid systemic or contagion risk. The agreement determines: The introduction of a new leverage ratio to complement the solvency ratio and thus be able to stop the large indebtedness in the financial system.
The creation of a new liquidity standard based on two new ratios: one for short-term liquidity coverage and the other for long-term structural liquidity. In this way, banks can ensure they have sufficient liquidity to deal with unfavorable situations.
Additional control measures regarding risk management, corporate governance, the valuation of financial instruments, among others. Basel III post-crisis reforms In December , the Basel Committee on Banking Supervision approved some reforms to the Basel III framework to respond to the deficiencies identified by the global financial crisis and "lay the regulatory foundations for a resilient banking system that supports the real economy".
Therefore, taking into account that risk-weighted assets are "an estimate of risk that determines the minimum level of regulatory capital that a bank must maintain in order to face unexpected losses", the Basel III reforms consisted of: Improve the robustness and risk sensitivity of standard methods for credit risk, credit valuation adjustment risk CVA and operational risk. Restrict the use of internal model-based methods, by introducing limits on some of the parameters used to calculate capital requirements in the internal ratings-based method IRB for credit risk, and by eliminating the use of credit risk-based methods.
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