Basel III

Why does it matter?

The package changes how risk-weighted assets are calculated, so the capital ratio a bank reports can change even when its business has not.

Key benefits include:

• Less RWA variability

More risk-sensitive standardized approaches for credit and operational risk, and constraints on internally modeled approaches, make banks' capital ratios more comparable.

• A capital floor

Banks calculate RWA as the higher of the total from their approved approaches and 72.5% of the total calculated only with standardized approaches.

• One operational risk method

A standardized approach based on the Business Indicator and the bank's loss history replaces all existing Basel II operational risk approaches.

• A non-risk-based backstop

The leverage ratio is finalized, and G-SIBs must also meet a leverage ratio buffer set at 50% of their higher-loss absorbency requirement.

• Flexible adoption

A jurisdiction that implements only the standardized approaches and not the internal models is still compliant with the Basel framework.

How does it work?

The standard has seven parts: an introduction, the standardized approach for credit risk, the internal ratings-based approach for credit risk, minimum capital requirements for CVA risk, minimum capital requirements for operational risk, the output floor, and the leverage ratio. Banks must hold Common Equity Tier 1 of at least 4.5%, Tier 1 of at least 6.0%, and total capital of at least 8.0% of RWA, plus a 2.5% capital conservation buffer.

The output floor applies to RWA: a bank's RWA are the maximum of the total from approaches it has supervisory approval to use and 72.5% of the total calculated with the standardized approaches. The 2017 transition rose from 50% in 2022 to 72.5% in 2027; the March 2020 deferral moves each step back one year, ending on 1 January 2028.

In SmartSuite, Compliance Management holds the standard's requirements with owners and evidence, Enterprise Risk Management tracks operational risk, loss events, and key risk indicators, and Enterprise Reporting supports supervisory reporting packs. SmartSuite does not calculate regulatory capital; it tracks the controls and evidence around those calculations.

Key Elements

• Standardized approach for credit risk

Banks may choose between this approach, which assigns standardized risk weights, and the internal ratings-based approach. In jurisdictions that allow external ratings, banks may start from assessments by recognized external credit assessment institutions.

• Internal ratings-based approach

Banks may use internal rating systems for credit risk with explicit supervisory approval. The revised framework constrains internally modeled approaches, and the 1.06 scaling factor on IRB credit risk RWA no longer applies.

• CVA risk

A revised minimum capital requirement for credit valuation adjustment risk, implemented on the same date as the credit risk revisions.

• Operational risk

The Business Indicator (interest, leases and dividend; services; and financial components) is multiplied by marginal coefficients of 12%, 15%, and 18% by size bucket to give the Business Indicator Component, then scaled by an Internal Loss Multiplier based on average historical losses. Operational risk includes legal risk and excludes strategic and reputational risk.

• Output floor

RWA may not fall below 72.5% of RWA calculated with the standardized approaches, phased in from 50% and now ending on 1 January 2028.

• Leverage ratio

A finalized leverage ratio with a revised exposure definition and, for G-SIBs, a buffer equal to 50% of the higher-loss absorbency requirement, met with Tier 1 capital.

• Implementation dates

Originally 1 January 2022 for the credit, IRB, CVA, operational risk, and leverage ratio revisions, deferred to 1 January 2023, with the output floor transition running to 1 January 2028.

What does it cover?

The standardized approach for operational risk applies to internationally active banks on a consolidated basis, and supervisors may apply it to other banks. More generally, the Basel framework sets minimum standards: jurisdictions may adopt more conservative requirements or earlier transitional dates. National regulators, not the Basel Committee, enforce the rules, so a bank's obligations depend on how its jurisdiction has implemented them.

What are its objectives?

The Committee worked from three overarching principles in finalizing the reforms.

Strengthen the regulation, supervision, and practices of banks worldwide to enhance financial stability.

Reduce excessive variability of risk-weighted assets and restore credibility in their calculation.

Enhance the risk sensitivity of the standardized approaches and constrain internally modeled approaches.

Complement the risk-weighted capital ratio with a finalized leverage ratio and a revised capital floor.

Avoid significantly increasing overall capital requirements.

Framework in Context

This page covers the December 2017 package. Earlier Basel III documents are separate publications: the capital framework of December 2010 (revised June 2011), the Liquidity Coverage Ratio (January 2013), and the net stable funding ratio (October 2014). The 2017 operational risk standard sits beside the BCBS Principles for the sound management of operational risk and the Principles for operational resilience, and banks commonly also map it to ISO 31000 and COSO ERM.

Common Framework Mappings

Banks that apply the 2017 package connect its operational risk and governance requirements to the standards below.

Mapped frameworks include:

BCBS PSMOR 2021

BCBS Operational Resilience Principles

COSO ERM 2017

ISO 31000:2018