If you are working in the banking industry, chances are you have already heard of the Basel III implementation. Basically, Basel III implementation is a form of global regulatory standard on banking.
This is more about the market liquidity test, stress testing, capital adequacy and other matters as per information from Basel Committee on Banking Supervision.
Specifically, this has been developed way back in the year 2010 to 2011. However, this is scheduled to be implemented in 2013 and up to 2018. To know more on what this is all about, read the succeeding paragraphs.
Purpose of Basel III Implementation
The third installment of Basel Accords was developed in order to provide response on deficiencies regarding financial regulation. This is based on the reviews conducted way back in the late 2000s.
In addition to that, Basel III Implementation is designed to strengthen the requirements of bank capitals as well as provide new regulatory prerequisites on bank leverage as well as bank liquidity.
According to the information from OECD, Basel III implementation can decrease the annual GDP growth of about 0.05 up to 0.15 percent. Moreover, there are critics who suggest that its implementation can slow down the recovery from the financial crisis that has happened back in the late 2000s.
Particularly, Basel III Implementation requires banks to hold for up to 4.5 equity and about 6% of the 6% of Tier I capital of the risk weighted assists or RWA. In addition to that, there are also other things you can expect from this kind if implementation. One of which is the introduction of additional capital buffers.
Under this, there should be mandatory conservation buffer of about 2.5% as well as discretionary countercyclical buffer.
Because of this, it requires the national regulators to secure more or less 2.5% of their own capitals during the times of credit growth height. Furthermore, Basel III Implementation also offers a minimum of 3% leverage ratio with 2 required liquidity ratios. Liquidity Coverage Ratio or LCR requires most banks to hold a sufficient high quality liquid asset in order to provide coverage on the total outflows of net cash for more than 30 days.
On the other hand, the Net Stable Funding Ration or NSFR will require available amount needed for stable funding.
Key Dates Under Basel III Implementation
There are key dates you need to know in Basel III Implementation. By knowing these things, you will be able to know about the implementation aspect of the said matter.
• In the year 2013, the minimum capital requirement will be the start of gradual phasing. Therefore, there is a must to secure higher capital than before.
• In the year 2015, the minimum capital requirement is expected to be higher than the capital requirements that are fully implemented.
• 2016 will be the start of the gradual phasing in of conservation buffer.
• In 2019, the conservation buffer will already be fully implemented.
Based on the information from the United States Federal Reserve, December 2011 is the exact month and year when Basel III Implementation was implemented. This means that this was also the same year when the features of the said implementation were active in the US. However, it is still unclear if these rules would be applied on hedge funds, insurance and larger types of financial players.
The Impact of Basel III Implementation in Microeconomics
There is an OECD research that was released in February 17, 2011 stating that the medium impact of the Basel III Implementation is the GDP growth of about ?0.05% to ?0.15% in one year. The output of the economy is primarily affected by the increase in the bank lending spreads.
This is because banks pass higher bank funding costs because of the higher requirements in capital as well as from their customers. In order to meet the capital requirements in the year 2015, it is estimated that banks will increase their lending spreads on a total of 15 basis points. On the other hand, the capital requirements for 2019 can increase the lending spreads of banks by about 50 basis points.
Overall, Basel III Implementation is considered as a complex topic in the field of banking, as it is governed by complex principles. With the help of the information presented to you, you already have some overview of what Basel III Implementation is and the things to expect about it. Overall, there is no information in the internet as to whether Basel III Implementation will provide positive or negative effects.
Possibly, the effects of Basel III Implementation may be felt sooner or later depending on the institution where your business belongs.
In order for you to know more about the said implementation, you need to stay up-to-date with the current trends and news in the banking industry.