Basel III

Basel III is an internationally agreed set of measures developed by the Basel Committee on Banking Supervision in response to the financial crisis of 2007-09. The measures aim to strengthen the regulation, supervision and risk management of banks. Like other Committee standards, Basel III sets minimum requirements for internationally active banks; members commit to implement them in their jurisdictions on the Committee's timetable. The reforms have been integrated into the consolidated Basel Framework.

The initial Basel III phase raised the quality and level of capital, with a greater focus on Common Equity Tier 1 (CET1), added capital buffers, strengthened risk capture for market, counterparty and securitisation exposures, introduced a non-risk-based leverage ratio, and created the Liquidity Coverage Ratio and Net Stable Funding Ratio. The Basel Committee's oversight body endorsed the finalisation of post-crisis reforms in December 2017, with market-risk framework adjustments following in January 2019.

How Basel III is used on bank EF, PF and CRE desks

Origination and portfolio teams translate Basel III into risk-weighted asset (RWA) outcomes, leverage exposure, and liquidity treatment for buyer credit loans, export credit agency (ECA) covered facilities, project finance loans and commercial real-estate exposures. Capital relief from official guarantees, political risk insurance or risk-participation structures is assessed against the implementing jurisdiction's transposition of the standardised or internal ratings-based approaches, not against marketing labels on a term sheet.

The finalisation package sought to restore credibility in RWA calculation and comparability of capital ratios. It enhanced standardised approaches for credit risk, CVA risk and operational risk; constrained internal model use, including input floors and removal of modelled approaches for CVA and operational risk; added a leverage ratio buffer for global systemically important banks; and replaced the Basel II output floor with a floor based on the revised standardised approaches. For credit risk, the revised standardised approach introduced more granular treatments for bank and corporate exposures, including standalone treatments for project finance, object finance and commodities finance, and more risk-sensitive residential and commercial real-estate risk weights linked in part to loan-to-value.

Capital, liquidity and what Basel III is not

Core capital metrics highlighted in Committee summaries include a CET1 minimum of 4.5% of risk-weighted assets, a 2.5% capital conservation buffer of common equity (bringing the total common equity standard to 7%), and a countercyclical buffer within a 0 to 2.5% range comprising common equity. Global systemically important banks face additional CET1 loss-absorbency requirements. The LCR requires enough high-quality liquid assets to cover a 30-day stressed outflow scenario; the NSFR addresses longer-term funding stability.

Basel III is a prudential standard for banks, not a credit agreement covenant package and not an ECA eligibility rule. National implementation, output-floor phasing and supervisory add-ons determine the binding constraint for any desk. Facility structuring therefore starts from the home regulator's rulebook that gives Basel III legal effect, then maps guarantee, collateral and maturity features into that rulebook's exposure classes.