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   Rajnish Ramchurun says August 24, 2011 at 3:02 pm

   “Basel III” is a comprehensive set of reform measures, developed by the
   Basel Committee on Banking Supervision, to strengthen the regulation,
   supervision and risk management of the banking sector. These measures aim
   to:
   1. improve the banking sector’s ability to absorb shocks arising from
   financial and economic stress, whatever the source
   2. improve risk management and governance
   3. strengthen banks’ transparency and disclosures.
   The reforms target both micro and macro prudential regulation.
   Micro Prudential Regulation
   At bank-level, or microprudential, regulation, they will help raise the resilience
   of individual banking institutions to periods of stress. Practically, these reforms
   mean:
   A significant increase in risk coverage, with a focus on areas that were most
   problematic during the crisis, that is trading book exposures, counterparty
   credit risk, and securitisation activities;
   A fundamental tightening of the definition of capital, with a strong focus on
   common equity. At the same time, this represents a move away from complex
   hybrid instruments, which did not prove to be loss absorbing in periods of
   stress. We also introduced requirements that all capital instruments must
   absorb losses at the point of non-viability, which was not the case in the crisis;
   The introduction of a leverage ratio to serve as a backstop to the risk-based
   framework;
   The introduction of global liquidity standards to address short-term and longterm
   liquidity mismatches; and
   Enhancements to Pillar 2’s supervisory review process and Pillar 3’s market
   discipline, particularly for trading and securitisation activities.
   Macro Prudential Regulation
   In addition, a unique feature of Basel III is the introduction of macroprudential
   elements into the capital framework. At macroprudential, they wlll help to deal
   with system wide risks that can build up across the banking sector as well as
   the procyclical amplification of these risks over time. These include:
   Standards that promote the build-up of capital buffers in good times that can
   be drawn down in periods of stress, as well as clear capital conservation
   requirements to prevent the inappropriate distribution of capital;
   The leverage ratio also has system-wide benefits by preventing the excessive
   build-up of debt across the banking system during boom times.
   To minimise the transition costs, the Basel III requirements will be phased in
   gradually as of 1 January 2013.
   These two approaches to supervision are complementary as greater
   resilience at the individual bank level reduces the risk of system wide shocks.
   Basel III is part of the Committee’s continuous effort to enhance the banking
   regulatory framework. It builds on the International Convergence of Capital
   Measurement and Capital Standards document (Basel II).

   Sources

   Basel III: stronger banks and a more resilient financial system
   Speech by Stefan Walter, Secretary General, Basel Committee on Banking
   Supervision, at a Conference on Basel III by the Financial Stability Institute,
   Basel, 6 April 2011.

   International regulatory framework for banks (Basel III)
   Available at: http://www.bis.org/bcbs/basel3.htm

   Prepared by: Rajnish Ramchurun
   B.Sc(Hons), MBA, ACCA, MIPA, Associate ACFE, Basic Member OCEG, Member Basel III
   Compliance Professionals Association, IFAC Online Registered User, AICPA Online
   registered User, IFRS Online Registered User.