About Basel III Endgame
- The final set of rules of Basel III norms has been called “Basel III Endgame.”
- Basel III is a set of measures developed by the Basel Committee on Banking Supervision to strengthen the regulation, supervision, and risk management of banks.
- Potential impact of the Endgame includes Globally Systemically Important Banks (G-SIBs) experiencing an increase of 21% in capital requirements.
- Proposed changes are aimed at improving the “strength and resiliency” of the banking system while also improving transparency and consistency in banks’ capital frameworks.
Basel Committee on Banking Supervision (BCBS):
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- Genesis: Established by central bank Governors of G10 countries at the end of 1974.
- Members: It has 45 members comprising central banks and bank supervisors (RBI is one of its members).
- Functions:
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- Established to enhance financial stability by improving the quality of banking supervision worldwide.
- Serves as a forum for regular cooperation between member countries on banking supervisory matters.
- Governance: BCBS reports to its oversight body “Group of Central Bank and Governors and Heads of Supervision (GHOS)”.
- Implementation of decisions: Its decisions do not have legal force.
Important Terminologies related to Basel Norms
- Tier I capital (Core Capital): It include paid up share capital, stocks and disclosed reserve.
- These are more permanent in nature and as a result, have high capacity to absorb losses.
- Tier II capital (Supplementary Capital): It includes all other capital e.g. Undisclosed reserve, revaluation reserves, general provisions and loss reserves.
- It is considered less reliable than Tier 1 capital because it is more difficult to accurately calculate and more difficult to liquidate.
- Risk weighed Assets (RWA): RWA is linked to minimum amount of capital that banks must have relative to bank’s risk from its lending activities. The more the risk, the more the capital needed to protect depositors.
- Capital Adequacy Ratio (CAR) or Capital to Risk (Weighted) Assets Ratio: CAR is a percentage that measures a bank’s financial health by comparing its capital to its risk-weighted assets.
- Liquidity Coverage Ratio (LCR): LCR is a requirement that requires banks to maintain a minimum amount of liquid assets to withstand cash outflows over a 30-day period.
- Leverage ratio: The leverage ratio i.e. ratio of Tier I capital to the bank’s average total consolidated assets (sum of the exposures of all assets and non-balance sheet items).
- Leverage ratio shows how much of a company’s capital comes from debt, or how well it can meet its financial obligations.
- Net Stable Funding Ratio (NSFR): It is a liquidity standard that measures the amount of stable funding a bank has relative to amount it needs.
- It promotes resilience by creating incentives for banks to fund their activities with more stable sources of funding.
- Capital Conservation Buffer: Banks are required to hold capital conservation buffer to ensure cushion of capital that can be used to absorb losses during financial stress.
- Countercyclical Buffer: It is a mechanism that allows banks to build up capital during periods of excessive credit growth to help the banking system absorb losses during downturns