Basel in brief

Basel I

  • Basel I is a set of international banking rules drawn up by the Basel Committee in 1988. This regulation imposed minimum capital standards on financial institutions from 1992.
  • Banks that were active internationally were required to hold at least 8% own equity against their outstanding risk-weighted assets (RWA). These assets were given a weighting of between 0% and 100%, depending on their allocation to 1 of 5 categories.
  • Depending on whether the assets involved more or less risk, the banks had to hold between 0% (in fact 0% of 8%) and 8% (in fact 100% of 8%) core capital against the value of the assets. In Basel I, government debt was given a risk weighting of 0, while most corporate debt was given a risk weighting of 100.

Basel II

  • Basel II introduced 3 pillars:
    • Pillar I: minimum capital requirements
    • Pillar II: supervisory review (the regulator was given the possibility, among other things, of adapting the capital requirements according to the profile of the financial institution)
    • Pillar III: improving market discipline by having banks provide more information
  • The new rules also added several elements to (among other things) the risk weighting for Basel  I.

Basel III

  • The new regulation includes two important new criteria, mainly aimed at strengthening the quality of the capital and the liquidity of banks.
  • At least 4.5% of the minimum capital of 10.5% that a bank must hold is core capital (common equity tier 1: capital of the highest quality). That is more than double compared with Basel II. Furthermore, a bank must hold 1.5% additional tier 1 and 2% tier 2. Extra buffers have also been introduced in the form of a capital conservation buffer of 2.5% and an anti-cyclical buffer that can vary between 0 and 2.5%. There is also an additional capital buffer for systemic financial institutions.
  • Liquidity is linked to:
    • the liquidity coverage ratio (LCR). The LCR consists of a series of criteria to estimate whether a bank will be able to survive a stress situation of 30 days in terms of liquidity (immediately available capital)
    • the net stable funding ratio (NSFR). The NSFR is a measure that tries to bring banks’ financing more into line with the duration of their assets (including the loans they grant or the bonds they have on their balance sheets). The NSFR tries to encourage banks to maintain adequately stable financing and thereby increase their stability.