III. Basel III Norms

There has been significant progress towards implementation of Basel III risk-based capital standards, the liquidity standards, the standards for global and domestic systemically important banks (SIBs), the leverage ratio, the large exposure framework and the interest rate risk in the banking book (IRRBB). Basel III Capital Regulations will be fully phased in for Indian banks by March 31, 2019, i.e., close to the internationally agreed date of January 1, 2019.

Basel III

• In 2010, Basel III guidelines were released. These guidelines were introduced in response to the financial crisis of 2008. A need was felt to further strengthen the system as banks in the developed economies were under-capitalized, over-leveraged and had a greater reliance on short-term funding. Too much short-term funding makes the banks prone to risks. Banks generally rely on short-term funding because it is profitable.
• Also, the quantity and quality of capital under Basel II were deemed insufficient to contain any further risk. This was because the banking system was growing. The world economy was growing too. Hence, what is sufficient earlier was not sufficient now.
• Basel III norms aim at making most banking activities such as their trading book activities more capital-intensive. The guidelines aim to promote a more resilient banking system by focusing on four vital banking parameters viz. capital, leverage, funding and liquidity.