Basel III is also known as Third Basel Accord or Basel Standards. It is a regulatory framework followed on a voluntary basis at a global scale. The framework deals with capital adequacy in banks, stress testing and market liquidity risk. The objective is to increase the liquidity of banks and decrease bank leverage. It was developed in response to the shortcomings in financial regulations exposed during the financial crisis of 2007-08.
Basel III Accord was developed by Basel Committee on Banking Supervision (BCBS).
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What are the 3 Main Pillars or 3 Main Principles of Basel III?
The 3 main pillars or 3 main principles of Basel III are given below.
- Minimum Capital Requirements
- Leverage Ratio
- Liquidity Requirements
How Does Basel III Affect Banks?
The Cost of increasing capital ratios may lead banks to raise their lending rates and thereby resulting in reduction of lending. This will have a significant impact on the economy due to lower investment, lower exports and lower consumption.
What is the Basel Committee on Banking Supervision?
Basel Committee on Banking Supervision was established in 1974 by the Governors of Central Banks belonging to Group of 10 (G-10 ) countries. This was in response to the disruptions in financial markets. The objective of this committee is to strengthen the regulations, supervisions and banking practices globally. Basel Committee reports to the Group of Governors and Heads of Supervision (GHOS). The Committee was expanded in 2009 to 27 jurisdictions. India was included in this expansion. Basel Committee has formulated Basel I, Basel II, and Basel III accords. The secretariat of Basel Committee on Banking Supervision (BCBS) is located in Basel, Switzerland at the Bank for International Settlements (BIS).
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