Under Basel III the total capital a bank is required to hold is
8.0% of its risk-weighted assets. Total capital is divided into two
broad categories: Tier I capital and Tier II capital. Broadly
speaking, Tier I capital is capital that is available to absorb
losses on a "going-concern" basis, or capital that can be
depleted without placing the bank into insolvency, administration
or liquidation. Tier II capital is capital that can absorb losses
on a "gone-concern" basis, or capital that absorbs losses
in insolvency prior to depositors losing any money.
Tier I capital
Tier I capital is in turn comprised of both Common Equity Tier I
capital and Additional Tier I capital. Common Equity Tier I capital
is the purest form of capital and includes common shares and
retained earnings. The required ratio of Common Equity Tier 1
capital to risk-weighted assets will go up from 2% to 4.5% under
Basel III. This percentage will also be more difficult to meet as
Basel III have introduced stricter regulatory adjustments. These
new capital requirements will be progressively phased in between 1
January 2013 and 1 January 2015.
Additional Tier I capital mainly consists of instruments issued
by the bank which are able to meet specific criteria (and are not
included in Common Equity Tier I capital). Basel III has introduced
stricter criteria for determining what constitutes Additional Tier
I capital in order to ensure these instruments absorb losses of a
bank on a going-concern basis.
In addition, the minimum total Tier I capital requirement will
increase from 4% to 6% under Basel III and will be progressively
phased in between 1 January 2013 and 1 January 2015.
Capital conservation buffer
Basel III has also introduced a capital conservation buffer
which requires an additional 2.5% of Common Equity Tier I capital
to be held over and above the absolute minimum requirements. This
buffer is intended to be available to be drawn down during periods
of stress. If the buffer falls below 2.5%, constraints on a
bank's ability to distribute earnings will be progressively
applied on a sliding scale.
Counter-cyclic capital buffer
A separate counter-cyclical buffer has also been introduced to
ensure that the banking sector's capital requirements take
account of the macro-economic environment in which banks operate.
This buffer will range between 0 to 2.5% of a bank's
risk-weighted assets and will be determined by the relevant
regulator in each jurisdiction. The regulator will determine the
level of the buffer according to its perception of the systemic
risk that has built up in the banking system as a result of excess
The Basel Committee has also introduced a new non risk-weighted
leverage ratio to prevent banks building-up excessive on- and
off-balance sheet leverage. The Basel Committee is currently
testing a minimum Tier 1 leverage ratio of 3% of bank exposure,
which generally follows the accounting measure of exposure.
Global liquidity standards
The Basel Committee has also introduced
new global liquidity standards. These standards have been
introduced to ensure that banks have sufficient liquid assets to
survive acute and longer-term stress scenarios.
Systemically important banks
The Basel Committee has also proposals in place to require
systemically important banks to have loss-absorbing capacity beyond
the minimum standards. Work on this issue is continuing and the
Basel Committee has not yet stated what banks will be considered
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guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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