Basel III Summary – Guide to the changes

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The Bank of International Settlements announced changes to the Basel rules on capital adequacy, now referred to as Basel III in September 2010.

Instead of boring you with more words, we thought we would create a Basel III Summary visual guide to illustrate the changes. There is also a textual summary of Basel III below the image.

Basel III Summary and Changes

Summary of Basel III changes

  • Minimum common equity requirement 2 to 4.5%
  • Capital conservation buffer 2.5% – met with common equity. If under, greater contraints on earning distributions are imposed
  • Total common equity requirement is 7%
  • Higher capital requirements for trading, derivatives, securitisation at end 2011
  • Tier 1 capital from 4 to 6% over the same period
  • Countercyclical buffer in the range of 0 to 2.5% of common equity according to national circumstances
  • Supplemented by non risk based leverage ratio
  • Pillar 1 treatment will start on the 1st January 2018

Systemically important banks should have a loss absorbing capacity beyond the standards above. Such guidelines are being developed which could include capital surcharge, contingent capital and bail in debt.

Note: Large banks need a significant amount of additional capital.

Transitional arrangements for Basel III

Implementation will begin on 1 January 2013 and member countries must transfer this into law by that time.

The following graph shows the implementation of the Basel buffers over time to 2010.

Posted by on Friday, August 24th, 2012. Filed under Features and Editorial. You can follow any responses to this entry through the RSS 2.0. You can leave a response or trackback to this entry

2 Comments for “Basel III Summary – Guide to the changes”

  1. Does anybody know what assets will be allowable Common Equity? What will be removed and will any be added?

    I understand retained earnings will be allowed but what other items.

    I have searched the internet and not found any information on this.

  2. I heard someone argue that gold would be allowed, but I would find that unlikely.

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