How does Basel-III differ from Basel-II? Explain

Basel II and Basel III are international banking regulations issued by the Basel Committee on Banking Supervision (BCBS).

Key Differences Between Basel II and Basel III

Though both regulations aim at financial stability in financial institutions, there are some differences between them. The notable differences are as follows:

(a) Introduction Year

Basel II was introduced in 2004, whereas Basel III was introduced in 2010-2011 after the global financial crisis of 2008.

(b) Main Objectives

The main objective of Basel-II is to improve risk management and capital adequacy, whereas Basel-III aims at strengthening financial stability.

(c) Focus Areas

Basel-II focused on credit risk, market risk & operational risk, whereas Basel-III focuses on capital strength, liquidity, and leverage control.

(d) Minimum Capital Adequacy Ratio

In Basel-II, the minimum Capital Adequacy Ratio (CAR) was 8% of Risk-Weighted Assets (RWA), whereas in Basel-III, the minimum CAR is set at 10% plus an additional buffer.

(e) Common Equity Tier-1 (CET1)

In Basel-II, there was no requirement for Common Equity Tier-1 capital. In Basel-III Regulations, the minimum Common Equity Tier-1 capital requirement is set at 4.5%.

(f) Tier-1 Capital

Basel II accord put less emphasis on Tier-1 capital, whereas Basel-III requires a minimum 6% of Tier-1 Capital.

(g) Capital Conservation Buffer

Basel II didn’t require any Capital Conservation Buffer, whereas Basel-III required a 2.5% Capital Conservation Buffer.

(h) Liquidity Standard

Basel II didn’t issue any liquidity framework. But Basel-III issued two liquidity frameworks, namely the Liquidity Coverage Ratio (LCR) and the Net Stable Fund Ratio (NSFR).

(i) Leverage Ratio

Leverage Ratio measures a bank’s financial strength by comparing Tier-1 capital with total exposure/assets. Basel-II regulation didn’t include any leverage ratio, whereas Basel-III required the maintenance of minimum 3% leverage ratio.

(j) Overall Nature

Basel II accords are risk management-oriented, whereas Basel-III accords are crisis prevention and stability-oriented.