The Bank of International Settlements announced changes to the Basel rules on capital adequacy, now referred to as Basel III in September 2010.
Instead of boring you with more words, we thought we would create a Basel III Summary visual guide to illustrate the changes. There is also a textual summary of Basel III below the image.
Summary of Basel III changes
- Minimum common equity requirement 2 to 4.5%
- Capital conservation buffer 2.5% – met with common equity. If under, greater contraints on earning distributions are imposed
- Total common equity requirement is 7%
- Higher capital requirements for trading, derivatives, securitisation at end 2011
- Tier 1 capital from 4 to 6% over the same period
- Countercyclical buffer in the range of 0 to 2.5% of common equity according to national circumstances
- Supplemented by non risk based leverage ratio
- Pillar 1 treatment will start on the 1st January 2018
Systemically important banks should have a loss absorbing capacity beyond the standards above. Such guidelines are being developed which could include capital surcharge, contingent capital and bail in debt.
Note: Large banks need a significant amount of additional capital.
Transitional arrangements for Basel III
Implementation will begin on 1 January 2013 and member countries must transfer this into law by that time.
The following graph shows the implementation of the Basel buffers over time to 2010.