Basel III

Basel III, which replaces Basel II, is a global regulatory standard that addresses capital adequacy, stress tests and market liquidiy risk.

The new rules are focused upon assessment of risks and the associated capital requirements that banks must set aside for their risk profile.

The goal of the accord is to strengthen bank capital requirements and provide new regulations that address bank leverage and liquidity ratios.

Essentally Basel III requires banks to maintain a 4.5% of common equity and 6% of Tier I capital in regard to risk-weighted assets (RWA).

In addition the Liquidity Coverage Ratio requires banks to maintain sufficient liquid assets of high-quality to cover total anticipated net cash outflows for 30 days.

There is an additional Net Stable Funding Ratio that requires the amount of stable funding to be sufficient to cover the amount of stable funding for a one-year period.

The new Accord is built upon three (3) tiers:

• Tier 1 Capital - must be common common shares and retained earnings
• Tier 2 Capital - will consist of harmonized instruments
• Tier 3 Capital - has been eliminated

The Basel III Accord:

• Minimum common equity is raised to 4.5%
• Capital buffer/common equity is raised to 2.5%
• Total common equity requirement is raised to 7%
• Increased capital requirements for derivative trading
• The leverage limit for banks has been set to 3%