The framework was proposed by the Basel Committee of Banking Supervision (BCBS) following the 2008-2009 Global Financial Crisis, which revealed significant issues with the capital requirement framework. Endorsed in the Seoul summit of 2010, the guidelines were set, and attention was shifted to implementation – reflective of the lesson learned from Basel II, which made it clear that early bird evaluation and analysis cannot be undervalued. Basel III was introduced in 2010-2011 and was first set for implementation in 2013-2015, but was extended to 2018 and then 2019. Unlike Basel I and Basel II, the third instalment focuses mainly on risks stemming from a bank run, not bank loss reserves, meaning that the new regulations will work alongside the first two packages, but not replace them.
The Basel Committee is the primary global standard-setter for the prudential regulation of banks and provides a forum for cooperation on banking supervisory matters. Its mandate is to strengthen the regulation, supervision and practices of banks worldwide with the purpose of enhancing financial stability. (Bank for International Settlements, 2016)
The key guidelines are of three different perspectives, namely liquidity, leverage and capital requirements. The degree of liquidity is dictated by the liquidity coverage ratio and the Net Stable Funding Ratio which both cannot exceed 100%. Leverage requirements are in accordance with the non-risk based leverage ratio, which is calculated by taking Tier 1 Capital over average total consolidated assets and cannot exceed 3%. Often referred to as the most discussed factor of the Basel Accords - the capital requirements' component was last adjusted in 2015 when it was set to be enforced at all times and is reflected in Common Equity Tier 1 over Risk Weighted Assets (RWA); the gauge cannot exceed 4.5%. Additionally two safeguards were implemented – a 2.5%-of-RWA capital conservation buffer and a discretionary counter-cyclical buffer which set high credit growth periods as ones where national regulators are allowed to set a requirement of 2.5% additional capital.
The Net Stable Funding ratio the requires the available amount of stable funding to exceed the required amount of stable funding over a one-year period of extended stress. (Hal S. Scott, 2011)
The European Union's commission for financial services with Valdis Dombrovskis in the front seat has made a promise to outline the amendments to the Capital Requirements Directive IV and the Capital Requirements Regulation, which are in line with the new Basel III framework.
There has recently been lack of cohesiveness in the negotiation between major players involved. Latest news show Germany delivering an ultimatum, threatening that it is not ready to accept a deal at "any price". Vice chairman of the Federal Deposit Insurance Corp Thomas Hoenig points fingers to the US, claiming that it is incomprehensible why the United States would jeopardise the strength of the current system by setting lower standards. Alongside, Germany was quick to lay down a set of rules which are likely to not be well perceived in Washington.
A major demand by the largest European Union economy is to maintain the possibility for banks to use their own statistical models which could, as the US has put it, allow them to set their own rules. The second demand is the exclusion of a cap on benefits that banks can potentially gain upon the use of their own statistical models from the regulations. Andreas Dombret, a member of the Bundesbank Executive Board claims that the components just "work against the focus of risk" and provide a solely theoretical approach. Dombret argues that "Basel III has developed other instruments, such as the leverage ratio, to fight against risks of modelling and misuse."