It is the third set of banking rules agreed by central bankers and regulators from around the world at meetings in Basel, Switzerland, hence the name. Banks will have to raise hundreds of billions of euros in fresh capital over the next few years. More specifically, they will have to increase their core tier-one capital ratio – a key measure of banks’ financial strength – to 4.5% by 2015. In addition, they will have to carry a further “counter-cyclical” capital conservation buffer of 2.5% by 2019.
Why does it matter?
The idea is that if banks hold a bigger capital cushion they will be better prepared for another downturn so we avoid a re-run of the financial crisis. Instead of holding capital equivalent to just 2% of their risk-bearing assets, banks will have to hold 7% of top-quality capital in reserve.
What were Basel I and II?
In 1988, the Basel Committee on Banking Supervision published a set of minimal capital requirements for banks, mainly focused on credit risk, which was enforced in the Group of 10 countries in 1992. The second of the Basel accords, published in 2004, was designed to create an international standard on banks’ capital requirements. Not all of it has been implemented yet.
Learn more : Basel III
Reference :http://www.guardian.co.uk/business/2010/sep/13/basel-iii-q-and-a
Image Reference: http://mthink.com/revenue/content/delivering-profitability-through-basel-ii-compliance