Goal of Basel III: strong and resilient banking system as a basis for sustainable economic growth.
After the experience of the recent financial crisis, it is clear that the principles included in Basel II are not sufficient. Banks were trying to circumvent the set rules and high-risk assets baffled from their balance sheets, so held a level of capital below than which corresponded to their actual risk exposure. In addition, it often happened that even in cases of large banks’ financial difficulties generous bonuses were paid to their executives and dividends to shareholders, as continued to exacerbate the banks’ situation.
These facts have led the Basel Committee to modify the banking regulation as Basel III. Its aim is to remove the pro-cyclicality of bank regulation, strengthen the banking system and increase banks discipline. The role of countercyclical capital buffer is to absorb losses in times of crisis and to ensure that the bank is able to maintain its capital adequacy ratio above the minimum required level. This is related to the introduction of new rules prohibiting the payment of dividends or bonuses in case that the banks will deal with financial problems. Dividends, bonuses and other rewards further weaken the banks and cause pro-cyclical.
Timeline of Basel III: gradually from 2013 to 2019
Basel II x Basel III:
- Some areas of regulation improve on the basis of new knowledge (e.g. capital adequacy), others are newly included in the regulation (e.g. debt ratios and liquidity standards)
- Measures not only at the micro level (e.g. capital and capital adequacy ratio, debt ratios, strengthening liquidity), but also the new macro prudence (counter-cyclical capital buffers)
- Target state: regulatory capital amounting to 10.5% of risk-weighted exposure including safety cushions 2.5% recommended by the Basel Committee implemented into EU law