Last updated on September 5th, 2023 at 05:55 pm
What are Basel 3 Norms?
Hello friends, if you are going through the Basel 1 Norms and Basel 2 Norms, then it is easy for you to understand the Basel 3 Norms. After reading Basel 3 Norms, you will champ in the Basel Norms. I have explained it step by step in easy language. It helps the job aspirants of Bank & UPSC and the job holders. So, it is the most important topic for all.
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Basel iii Norms
The Basel 3 Norms were launched in 2010 by the Basel Committee on Banking Supervision (BCBS) after the financial crisis 2008. In these norms also, the minimum capital requirements are 8%.
Tier 1 Capital – At least 6% of the bank’s capital reserve, and out of the 6%, 4.5% should be allocated for the common equity/Shareholder’s equity (CET1 Capital)
Tier 2 Capital – 2%
In India, according to the RBI Guidelines, 9% is allocated for the CAR, and an extra 2.50% is also allocated from the CET1 Capital.
Where, T1 -7%, T2 – 2% and CET1 – 5.5%
Implementation in India
The Reserve Bank of India adopted the Basel 3 Norms in March 2019 for all commercial banks. So, all India’s banks are keen to follow the Basel 3 Norms according to thE RBI’s footsteps.
RBI Launched 2 Extra Buffers to Safe Grade India’s Banking Sectors
- Capital Conservation Buffer: It is taken only from the Common Equity Tier1 (CET1) Capital of 2.5% of Risk Weighted Assets (RWA) and the minimum capital adequacy ratio of 9%. This buffer was launched to give an extra layer of usable capital.
- Counter-Cyclical Buffer: It is a type of buffer capital that provide security to the banking sector for periods of excess aggregate credit growth. According to the RBI rules, the banks must maintain it at 0-2.5%.
Leverage Ratio under Basel three norms
The leverage ratio is defined as the ratio of the Tier 1 Capital of the Bank to the total assets of the bank. It tells the bank how much assets are available to the bank/company in the form of debts.
A higher leverage ratio means the profit percentage of the banks will be reduced. But improving the leverage ratio also means that banks have efficient capital reserves, which will not affect the economy.
Leverage Ratio under Basel 3 = (Tier 1 Capital of the Bank/Total Bank Assets)× 100
- For Domestic Systemically Important Banks (DSIBs), Minimum Leverage Ratio = 4%
- For Other Banks = 3.5%
Liquidity Coverage Ratio (LCR) of Basel Three
The liquidity coverage ratio, introduced by the Basel Committee on Banking Supervision (BCBS), had directed the bank to estimate the High-Quality Liquid Assets (HQLAs) in advance to meet the 30-day net outgo under stressed conditions. It ideally needs to be 100%. So, LCR is a short-term (30 days) resilience).
LCR = [High-Quality Liquid Assets (HQLA)/Total Net Outflows]× 100%
Net Stable Funds Rate (NSFR)
It is defined as the banks’ requirement to maintain a stable funding profile in advance to manage medium-term activities over the one-year horizon. The minimum NSFR required is 100%.
NSFR = [Available Stable funding(ASF)/Required Stable Funding (RSF)]× 100%
Difference Between Basel ii Norms and Basel iii Norms
| Requirements | Basel 2 | Basel 3 |
|---|---|---|
| Minimum Ratio of Total Capital to Risk-Weighted Assets | 8% | 10.5% |
| Minimum Ratio of Common Equity to Risk-Weighted Assets | 2% | 4.5% |
| Tier 1 Capital to Risk-Weighted Assets | 4% | 6% |
| Capital Conservation Buffers to Risk-Weighted Assets | None | 2.5% |
| Leverage Ratio | None | DSIB Banks – 4%, Other Banks – 3.5% |
| Counter-Cyclical Buffer | None | 0 to 2.5% |
| Minimum Liquidity Coverage Ratio | None | 100% |
| Net Stable Funding Ratio (NSFR) | None | 100% |
Yes, in March 2019, the Basel 3 Norms had been implemented in all commercial banks in India.
With the implementation of Basel 3, banks had been instructed by the RBI to reserve an extra amount of assets as buffer money to save the depositors and the bank at the time of crisis. And also according to the Basel 3 Guidelines, banks need to calculate future expenses under stressed conditions.
In 2010, the Basel 3 Norms had been implemented by the Basel Committee on Banking Supervision (BCBS).
