Basel III - Objectives & Challenges

Objectives;-

• Improving to Banking Sector’s ability to absorb shocks arising from financial & economic stress.
• Improve Risk Management & Governance
• Strengthen Banks’ Transparency and Disclosures

Basel III is a set of international banking regulations developed by the  Bank for International Settlements in order to promote stability in the international financial system. The purpose of Basel III is to reduce the ability of banks to damage the economy by taking on excess risk. With that in mind, banks must hold more capital against their assets, thereby decreasing the size of their balance sheets and their ability to leverage themselves. While these regulations were under discussion prior to the financial crisis, their necessity is magnified as more recent events occur.

The Basel III regulations contain several important changes for banks' capital structures. First of all, the minimum amount of equity, as a percentage of assets, will increase from 2% to 4.5%. There is also an additional 2.5% "buffer" required, bringing the total equity requirement to 7%. This buffer can be used during times of financial stress, but banks doing so will face constraints on their ability to pay dividends and otherwise deploy capital. Banks will have until 2019 to implement these changes, giving them plenty of time to do so and preventing a sudden "lending freeze" as banks scramble to improve their balance sheets.

It is possible that banks will be less profitable in the future due in part to these regulations. The 7% equity requirement is a minimum and it is likely that many banks will strive to maintain a somewhat higher figure in order to give themselves a cushion. If financial institutions are perceived as being safer, the cost of capital to banks would actually decrease. Banks that are more stable will be able to issue debt at a lower cost. At the same time, the stock market might assign a higher P/E multiple to banks that have a less risky capital structure.

Year	2014	2019
Minimum Capital Equity Ratio	4.00%	4.50%
Minimum Tier 1 Capital	5.90%	6.00%
Minimum Total Capital		8.00%
Minimum Total Capital Conservation Buffer	8.00%	10.50%
Liquidity Coverage Ratio	60%	100%

Challenges; -

• Exercising Controls on the Capital, Liquidity, and Leveraging of Banks will ensure that they have to ability to withstand crises.
• Monetary Policy in Central Banks in Each Country (CRR, SLR, Repo Rate & Reverse Repo Rate) makes it difficult to uniformly implement BASEL Norms
• Its Hamper to Profit of Banks and Prevent to increase Salary of Employees in Banks.
• Every Central Banks have made their own selfish monetary Policy it is difficult to make balance due to implement of BASEL III Norms.
• It is difficult to depict exact calculation about Huge Financial Risk occur due to  experiment of Banks in Product   ( Liability & Lending).