What are the new capital accords of Basel-III in Bangladesh?

The new capital accords of Basel-III in Bangladesh were adopted to ensure stability in the banking industry. Bangladesh started implementing Basel-III on 20 January 2015, and the full implementation was completed in 2020. The following are the new capital accords of Basel-III:

1. Capital Requirement

The new regulation redefined the capital requirement, which is much tighter than the previous Basel-II regulation. Banks are now required to maintain more reserves, where Common Equity Tier-1 (CET-1) capital (common shares and retained earnings) was raised from 2% to 4.5%, and Tier-1 capital requirement was raised from 4% to 6%.

2. Capital Conservation Buffer

Basel-III introduced a new type of capital known as the Capital Conservation Buffer (CCB). The Capital Conservation Buffer is 2.5%, which is an additional capital reserve to tackle future stress. Adding 2.5% Capital Conservation Buffer, total Common Equity Tier-1 capital requirement stands at 7% (4.5% + 2.5%).

(3) Countercyclical Buffers

The new Basel-III accord imposes regulations to control total credit in the economy. If the credit volume increases faster, then the GDP there will have an additional countercyclical buffer that varies from 0% to 2.5%.

(4) Leverage Ratio

Leverage Ratio measures a bank’s financial strength by comparing Tier-1 capital with total assets.

(5) Liquidity Ratio

Taking lessons from the global financial crisis, Basel-III also introduced liquidity requirements, namely the Liquidity Coverage Ratio (LCR) and the Net Stable Fund Ratio (NSFR)