Difference between revisions of "Prudential Regulators: Basel III Final Rules"

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Latest revision as of 22:09, 14 July 2015

Timeline-Basel III Implementation, Prudential Regulators
Interim Final Rule Final Rule Implementation Phase-in
September 10, 2013 April 14, 2014 2015-2019

On July 2nd, 2013 the Prudential Regulators finalized rules on the implementation of the Basel III accords.


Basel III is the third installment of recommendations from the Basel Committee on Banking Supervision. Seeking to rectify problems that were exposed in the 2007-8 financial crisis, they have been adopted into US regulations. Building upon the prior Basel II and Basel I recommendations, they seek to impose new capital requirements and risk mitigation methods to stabilize the financial system.

Capital Requirement Rules[edit]

The final rule does not change the definition of Common Equity Tier 1 capital (CET1). The final rule requires that the effective minimum for CET1 requirements is 7%, while Global Systemically Important Financial Institutions (GSIFIs) are subject to a 10% effective CET1 requirement. The breakdown of the requirements are:

  • a CET1 ratio of 4.5
  • A 2.5% capital conservation buffer
  • a counter-cyclical buffer of 2.5% for advanced banks
  • for GSIFIs, an additional capital buffer of up to 2.5% as determined by regulators<ref>U.S Regulatory Capital Rules. Deloitte. Retrieved on May 14th, 2015.</ref>

Risk Weighting[edit]

The new Basel III rules introduce a new risk weight structure that reassesses various types of asset classes. This was in response to the failure of the risk weighting system in the financial crisis of 2007-08, after banks were bailed out.


A new RW system, for sovereign claims, has been established by Basel III. They are:

    • OECD member with no Country Risk Classification(CRC) is 0%
    • 0% for a a Sovereign CRC of 0-1, 20% for 2, 50% for 3, 4-6 is 100%, and 150% for a 7. Sovereign defaults are weighted at 150% and Non-OECD members with no CRC are weighted at 100%
  • Public sector entities outside of the the U.S. are weighted depending on CRC and OECD membership. They are as follows:
    • CRC of 0-1 has a 20% RW
    • CRC of 2 has a RW of 50%
    • CRC of 3 has a RW of 100%
    • CRC of 4 or greater has a RW of 150%
    • Sovereign defaults are weighted at 150%
    • OECD members have a RW of 20%

Unsettled Transactions[edit]

Unsettled transactions are weighted equivalent to positive current exposure x risk weight. The risk weights are broken down by time after settlement date:


Basel III has given new RWs to to equities exposure changing the former rule under Basel I.

  • 0% for Equity exposures to a sovereign, certain supranational entities (e.g. EU)
  • 20% for equity exposures to a PSE
  • 100% for community development investments and small business investment companies
  • 250% for Significant Investments
  • 300% for publicly-traded equity exposure
  • 400% for non-publicly traded equities
  • 600% exposure to firms that meet traditional securitization definition <ref>U.S. Basel III Final Rule: Standardized Risk Weights Tool. Davis Polk. Retrieved on May 14th, 2015.</ref>

Mortgages, Derivatives, and Defaulted Exposures[edit]

New risk weights have also been assigned to mortgages, OTC derivatives, and guaranteed defaulted exposures. After the 2007-08 crises, new rules governing the RW of mortgages, and defaulted exposures were deemed necessary by the BIS Basel Committee on Banking Supervision.

  • Mortgages will be have a risk weight(RW) of either 50% or 100% depending on type of mortgage
  • A new 20% RW for US guaranteed defaulted exposures
  • Removes 50% cap on on OTC derivatives

Final Rule as it Appears in The Federal Register[edit]


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