Basel III is an international regulatory accord that introduced a series of reforms to regulate banks' capital adequacy and stress testing. It was implemented in response to the deficiencies exposed by the global financial crisis. The key changes introduced by Basel III include stronger capital and liquidity requirements, a leverage ratio to monitor financial leverage, and measures to promote the build-up of capital buffers. Basel III aims to improve the banking sector's ability to absorb shocks from financial and economic stress and reduce risks.

2. An Overview Of
the BASEL iii
Presented by:
Rana Faisal Ali
Wajahat Hussain
Muneeb Rana
Azhar Sadiq

3. Introduction:
• Basel is a city in Switzerland which is also
the headquarters of Bureau of International
Settlement (BIS).
• BIS’s common goal:
 financial stability
 common standards
• BIS have 27 member nations in the
committee.

4. Basel – I Norms
In 1988, the Basel I Capital Accord was created. The
general purpose was to:
1. Strengthen the stability of international banking
system.
2. Set up a fair and a consistent international banking
system in order to decrease competitive inequality
among international banks.

5. Limitations of Basel – I Norms
• Limited differentiation of credit risk
• Static measure of default risk
• No recognition of term-structure of credit risk
• Simplified calculation of potential future counter party
risk
• Lack of recognition of portfolio diversification effects

6. Basel – II Norms
Basel – II norms are based on 3 pillars:
• Minimum Capital – Banks must hold capital against
8% of their assets, after adjusting their assets for risk
• Supervisory Review – It is the process whereby
national regulators ensure their home country banks
are following the rules.
• Market Discipline – It is based on enhanced disclosure
of risk

7. Pitfalls of Basel – II norms
• Too much regulatory compliance
• Over Focusing on Credit Risk
• The new Accord is complex and therefore demanding
for supervisors, and unsophisticated banks
• Strong risk differentiation in the new Accord can
adversely affect the borrowing position of risky
borrowers

8. Advantages of Basel II over I
• The discrepancy between economic capital and
regulatory capital is reduced significantly, due to that
the regulatory requirements will rely on banks’ own
risk methods.
• More Risk sensitive
• Wider recognition of credit risk mitigation.

9. Basel – III Norms
Basel – III norms aim to:
• Improving the banking sector's ability to absorb
shocks arising from financial and economic stress
• Improve risk management and governance
• Strengthen banks' transparency and disclosures

10. Structure of Basel – III Accord
• Minimum Regulatory Capital Requirements based on
Risk Weighted Assets (RWAs) : Maintaining capital
calculated through credit, market and operational risk
areas.
• Supervisory Review Process : Regulating tools and
frameworks for dealing with peripheral risks that banks
face
• Market Discipline : Increasing the disclosures that
banks must provide to increase the transparency of
banks

11. Major changes in Basel - III
• Better Capital Quality
• Capital Conservation Buffer
• Counter cyclical Buffer
• Minimum Common Equity and Tier I Capital
requirements
• Leverage Ratios
• Liquidity Ratios
• Systematically Important Financial Institutions

12. BASEL III ACCORD
• The G20 endorsed the new ‘Basel 3’ capital and liquidity
requirements.
• Extension of Basel II with critical additions, such as a leverage
ratio, a macro prudential overview and the liquidity framework.
• Basel III accord provides a substantial strengthening of capital
requirements.
• Basel III will place greater emphasis on loss-absorbency capacity on a
going concern basis
• The proposed changes are to be phased from 2013 to 2015

13. Basel III-Objectives
• Special emphasis on the Capital Adequacy Ratio
– Capital Adequacy Ratio is calculated as –
CAR = (Tier 1 Capital + Tier 2 Capital) / Risk Weighted
Assets
– Reducing risk spillover to the real economy
• Comprehensive set of reform measures to strengthen the
banking sector.
• Strengthens banks transparency and disclosures.
• Improve the banking sectors ability to absorb shocks arising
from financial and economic stress.

14. Major features of Basel III
• Revised Minimum Equity & Tier 1 Capital
Requirements
• Better Capital Quality
• Backstop Leverage Ratio
• Short term and long term liquidity funding
• Inclusion of Leverage Ratio & Liquidity Ratios
• Rigorous credit risk management
• Counter Cyclical Buffer
• Capital conservation Buffer

15. Impact on Pakistani banking system
• Profitability
• Capital acquisition
• Liquidity Needs
• Limits on lending
• Bank consolidation
• Pressure on Yield on Assets
• Pressure on Return on Equity:
• Stability in the Banking system

16. Conclusion
• One shoe doesn’t fit all.
• Monetary policies of Central Banks in each country
(example RBI’s CRR, SLR, Repo etc.) make it difficult
to uniformly implement BASEL norms
• Exercising controls on the capital, liquidity and
leveraging of banks will ensure that they have the
ability to withstand crises.