Table of Contents
- What Is Basel III?
- How Basel III Works
- Basel III Updates
- A Deeper Dive Into Basel III
- Basel III Delays
- Minimum Capital Requirements Under Basel III
- Capital Buffers to Weather Financial Storms
- Leverage and Liquidity Measures
- Why It Matters to Investors
- What Impact Would Basel III Have on the Profits of the Big Banks?
- What Effect Would Basel III Have on Small and Medium-Sized Banks?
- When Does Basel III Go Into Effect?
- The Bottom Line
What Is Basel III?
Let me explain Basel III directly to you: it's an international regulatory accord designed to mitigate risks in the banking sector by requiring banks to hold more capital. In the U.S., the final stage is called Basel III Endgame, which pushes the largest banks to reserve more capital to handle financial downturns.
You've probably heard the banking industry portraying these reforms as a danger to the American economy. They've mobilized lobbyists in Washington and spent millions on campaigns to oppose the rules, with supporters calling this push unprecedented.
Key Takeaways
- Basel III improves regulation, supervision, and risk management in banking.
- It was created in 2009 by central banks from 28 countries after the 2007-2008 crisis.
- This framework evolves with economic and financial changes.
- U.S. Basel III Endgame is slated to conclude in 2024, with rules effective mid-2025, though delays are possible.
How Basel III Works
The Basel regulations emerged after the 2007-2009 financial crisis, when global watchdogs gathered to prevent repeats. They agreed on minimum capital, leverage, and liquidity standards through the Basel Committee to help major banks survive turmoil. In the U.S., the final pieces are Basel III Endgame, to be enforced by the Federal Reserve, FDIC, and OCC.
Industry groups like the Bank Policy Institute are warning that these rules affect about 37 U.S. banks with $100 billion or more in assets. They argue it could hinder homeownership for young families and growth for small businesses. Banks say the changes won't improve stability but will limit lending to those with weaker credit, including historically underserved minorities.
Basel III Updates
Regulators started softening their 2023 proposals right after the 2024 comment period, angering supporters. Senator Elizabeth Warren confronted Fed Chair Jerome Powell in March 2024, accusing him of backing down under bank pressure.
The final rules are due for release, effective July 1, 2025, with a three-year phase-in. But Moody's predicts delays due to ongoing disputes. The Bank of England delayed its rollout to January 2027, watching for U.S. shifts under President Trump.
A Deeper Dive Into Basel III
Basel III came from the Basel Committee shortly after the 2007-2008 crisis, when banks were overleveraged despite Basel I and II. It's the Third Basel Accord, building on a framework started in 1975.
Basel I, from 1988, required 8% of risk-weighted assets as a buffer post-Latin American debt crises. Basel II in 2004 added sophisticated risk models for operational and market risks. But the 2007-2008 storms showed Basel II's limits, leading to Basel III's focus on liquidity, leverage, and systemic risks.
Basel III Delays
Many Basel III elements are already active globally, including in the U.S. The Endgame, agreed in 2017, was delayed by COVID-19 and bank lobbying. The latest U.S. deadline is July 1, 2025, with a three-year rollout, but it's not set in stone. It updates risk calculations for loans, internal models, and operational risks like fraud.
Minimum Capital Requirements Under Basel III
Banks use two capital types: Tier 1, which is core equity and reserves for absorbing losses, and Tier 2, supplementary like undisclosed reserves. CET1 is the safest part of Tier 1.
Under Endgame, banks over $100 billion must reserve more for losses, using the strictest risk calculation methods. They need at least 6% Tier 1 of risky assets, with total capital at 8%, emphasizing higher-quality forms. This could raise requirements by up to 20% for big banks.
Capital Buffers to Weather Financial Storms
Basel III adds buffers above minimums to build reserves in good times. The capital conservation buffer is 2.5% CET1, raising effective CET1 to 7%, with restrictions if dipped into. The countercyclical buffer, 0-2.5%, applies during credit booms. G-SIBs face a 1-3.5% surcharge for systemic risks.
Leverage and Liquidity Measures
New rules include a 3% leverage ratio for G-SIBs and liquidity coverage requiring high-quality assets for 30 days of stress. The net stable funding ratio must be 100%, promoting stable long-term funding over short-term sources.
Why It Matters to Investors
These regulations affect the economy and markets, building confidence for stable lending in downturns. Critics say higher capital could slow growth by reducing lending, but proponents argue it enables more secure lending. Overall, it aims for a resilient system reducing risks to your investments.
What Impact Would Basel III Have on the Profits of the Big Banks?
Banks expect profit hits from reserving more capital instead of investing it, potentially affecting stocks and dividends. Yet, better-capitalized banks might attract investors as safer bets long-term.
What Effect Would Basel III Have on Small and Medium-Sized Banks?
It mainly targets large banks, but critics say smaller ones could face indirect costs. Regulators deny this, noting flexibility for their profiles.
When Does Basel III Go Into Effect?
U.S. rules start July 1, 2025, with a three-year phase-in, but delays from lobbying and economic shifts are likely.
The Bottom Line
The 2007-2008 crisis revealed banking flaws, so Basel III fortifies banks against shocks. Debates continue as the 2028 full implementation nears, balancing protections against economic risks.
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