Basel III is the latest of a set of international banking regulations stemming from the financial crisis of 2009. Building on the earlier set of Basel II banking rules, Basel III Capital Requirements begin phasing in on January 1, 2013 and continue through 2019.
Basel III builds on three pillars introduced by Basel II. The first pillar is increased capital ratio requirements for banks. In 2013, these higher capital ratios, expressed in risk-weighted assets, begin phasing in. As of January 2013, banks must have a minimum of 3.5% of capital made up of Common Equity. This ratio will increase to 4% in 2014 and cap at 4.5% in 2015. The 2013 minimum amount of Common Equity, combined with the buffer for Capital Conservation, will also be 3.5%. The two ratios are the same in 2013 because the buffer requirement does not begin phasing in until 2016. Basel III sets the minimum ratio of the Tier One Capital in 2013 to be 4.5%. This ratio will increase to 5.5% in 2014 and cap at 6.0% at 2015.
Finally, the Minimum Total Capital ratio in 2013 will be 8.0%. This is will not increase over time. The ratio is the same through final implementation of Basel 3 in 2019. The minimum combined Capital/Conservation Buffer, however, does phase in over time. In 2013, it will be the same as the minimum requirement of total capital because the required buffer, which will eventually reach 10.5%, does not begin phasing in until January of 2016.
One objective of the Basel III capital requirements is to increase the quality of capital held by banks, in addition to increasing capital ratios. The regulations increase emphasis on capital made up of common equity, paid-in common shares and retained earnings, by making them the predominant form of Tier One Capital. Some classes of capital instruments will begin phasing out of qualification as Non-core Tier One or Tier Two Capital in 2013. Tier Three types of capital will no longer be considered.
The overall objective of these requirements is to encourage banks to increase their asset quality. One significant element is that the ratios of capital requirement are factored by risk-weighting of the value of the capital. Assets with a higher risk contribute less to the ratio, and less risky assets contribute more. Timely risk data collection and evaluation will be essential from the first phases of Basel 3 implementation.