Basel Committee on Banking Supervision (BCBS) introduced BASEL III in December 2010. This came out as an improved version of BASEL II. It especially focused on more sound financial stability and risk management in the banking sector after the financial crisis of 2007/08. BASEL III is also known as “A Global Regulatory Framework for More Resilient Banks and Banking Systems”. The updated version of BASEL III was introduced in June 2011 with some changes to its original version in 2010. It is being followed as the basic norm to regulate and supervise banks and banking systems around the world. BASEL III was introduced in Nepal in 2016 and it is being used as the basic guideline for regulating banks and financial institutions along with BASEL II.

Objectives

• To improve and enhance capital requirements, risk management and shock-absorbing capability of banks and financial institutions at the time of financial crisis and stress
• To strengthen the supervisory review process of banks and financial institutions through better, efficient, and improved techniques
• To ensure and strengthen transparency in disclosure of financial and non-financial affairs of banks and financial institutions

Key Features of BASEL III

• Strict and broad definition of capital regarding what is to be and what is not to be considered as capital
• Common equity has to be maintained at 4.5% of risk-weighted assets which was previously only 2% as per BASEL II
• The total tier 1 capital has to be maintained at 6% of total risk-weighted assets which is only 4% as previously defined by BASEL II
• Additional buffer, called as Capital Conservation Buffer, has to be maintained at 2.5% of total risk-weighted assets which makes the total capital requirement of 10.5%, of which 8.5% has to come from tier 1 capital
• Provision of tier 3 capital as provided by BASEL II has been removed which means tier 1 and tier 2 capitals form total capital in BASEL III
• Provision of Counter-Cyclical Buffer was introduced which has to be maintained between 0% to 2.5%
• Introduced the concept of Leverage Ratio (Tier 1 Capital/Total Assets) which has to be maintained at 3% by banks
• Introduced Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) to cover cash crisis situation for 1 month and 1 year respectively