📍 Basel III
Basel III is an international banking regulatory framework designed to strengthen global banking stability by ensuring that banks maintain adequate capital, leverage, and liquidity, and can survive financial crises.
It was introduced after the 2008 Global Financial Crisis, when many banks collapsed due to weak capital foundations and poor risk management.
1️⃣ WHAT IS BASEL III?
🔹 Simple Definition
Basel III is a global regulatory standard issued by the Basel Committee on Banking Supervision (BCBS) to improve banking sector safety by strengthening capital adequacy, leverage ratios, and liquidity standards.
➡ Focus: Prevent bank failures and protect depositors
2️⃣ OBJECTIVES OF BASEL III
✔ Improve bank ability to absorb financial shocks
✔ Reduce risk of bankruptcy and protect depositors
✔ Improve risk management & governance
✔ Increase transparency & reporting
✔ Strengthen global financial system stability
3️⃣ KEY COMPONENTS OF BASEL III
| Component | Meaning |
|---|---|
| Capital Adequacy | Minimum capital banks must maintain |
| Leverage Ratio | Limit on excessive borrowings |
| Liquidity Standards | Ensure enough cash to meet withdrawals |
| Buffers | Extra capital to deal with stress periods |
4️⃣ CAPITAL STRUCTURE UNDER BASEL III
| Type of Capital | Meaning | Components |
|---|---|---|
| Tier 1 Capital | Core capital used to absorb losses | CET-1 + AT1 |
| Tier 2 Capital | Supplementary capital | Subordinated debt, revaluation reserves |
| CET-1 (Common Equity Tier 1) | Highest quality capital | Equity shares & retained earnings |
| AT1 (Additional Tier 1) | Hybrid instruments | Perpetual bonds |
5️⃣ BASEL III CAPITAL REQUIREMENTS
| Requirement | Percentage |
|---|---|
| Minimum CET-1 | 4.5% of RWA |
| Minimum Tier 1 Capital | 6% of RWA |
| Total Capital Requirement (Tier 1 + Tier 2) | 8% of RWA |
| Capital Conservation Buffer (CCB) | 2.5% |
| Countercyclical Buffer | 0–2.5% |
| Minimum Total Capital including CCB | 10.5% |
6️⃣ BASEL III LIQUIDITY STANDARDS
| Standard | Meaning | Requirement |
|---|---|---|
| LCR (Liquidity Coverage Ratio) | Bank must hold enough liquid assets to survive 30-day stress | ≥ 100% |
| NSFR (Net Stable Funding Ratio) | Stable funding for 1-year survival | ≥ 100% |
7️⃣ LEVERAGE RATIO
➡ Limits excessive borrowing compared to capital held.
| Definition | Formula | Requirement |
|---|---|---|
| Tier 1 Capital to Total Exposure Ratio | Tier 1 Capital / Total Exposure | ≥ 3% |
In India, RBI has stipulated 3.5% to 4.5% depending on bank category.
8️⃣ CAPITAL BUFFERS
| Type | Description |
|---|---|
| Capital Conservation Buffer (2.5%) | Extra capital for crisis |
| Countercyclical Buffer (0–2.5%) | Protect economy during rapid credit growth |
| Systemically Important Banks Buffer | Higher capital requirement for big banks (e.g., SBI in India) |
9️⃣ ADVANTAGES OF BASEL III
✔ Stronger financial stability
✔ Reduces bank collapse risk
✔ Increases investor & depositor trust
✔ Improves risk management practices
🔟 DISADVANTAGES / LIMITATIONS
❌ Higher capital requirement → reduced lending ability
❌ Increased compliance cost for banks
❌ Smaller banks face pressure to meet standards
❌ Slows economic expansion during strict periods
🔁 REAL BANKING EXAMPLES
- SBI is a Domestic Systemically Important Bank (D-SIB) → must maintain higher capital buffer
- Indian banks must maintain LCR & NSFR for digital payment stability
- RBI monitors Basel norms compliance during bank stress tests
🔥 Most Important for Exams (Must Remember)
- Basel III introduced after 2008 Financial Crisis
- Key focus = Capital + Liquidity + Leverage
- CET-1 = 4.5% | CCB = 2.5% | Total = 10.5%
- LCR ≥ 100% | NSFR ≥ 100%
- Leverage Ratio ≥ 3%
- Additional Buffer for D-SIBs like SBI
- CET-1 = highest quality capital
- BCBS = Basel Committee on Banking Supervision (HQ: Basel, Switzerland)
🧠 Memory Tricks / Formulas
| Trick | Meaning |
|---|---|
| 3Ls of Basel III | Liquidity + Leverage + Loss absorption |
| 10.5 Formula | Total minimum capital = 8% + 2.5% CCB |
| **LCR = 30 days survival | NSFR = 1 year survival** |
📌 Visual Table Summary
| Section | Key Points |
|---|---|
| Capital | CET-1, Tier-1, Tier-2 |
| Required % | CET-1 4.5%, CCB 2.5%, Total 10.5% |
| Liquidity | LCR & NSFR ≥ 100% |
| Leverage Ratio | ≥ 3% |
| Target Banks | All commercial banks |
| Aim | Financial stability & crisis protection |
📘 CHAPTER-WISE SUMMARY
Chapter 1 – Introduction
International banking safety framework by BCBS
Chapter 2 – Capital Requirements
CET-1, Tier-1, Tier-2, Buffers
Chapter 3 – Liquidity & Leverage
LCR, NSFR, Leverage Ratio
Chapter 4 – Banking Impact
Increased capital strength, reduced lending risk
Chapter 5 – India Specific
RBI implements Basel III in all commercial banks; SBI is D-SIB
⏳ 2-MINUTE QUICK REVISION SHEET
✔ Basel III = Global standard after 2008 crisis
✔ Focus = Capital + Liquidity + Leverage
✔ CET-1 = 4.5%
✔ Total Capital = 10.5% incl. CCB 2.5%
✔ LCR ≥ 100% (30 days)
✔ NSFR ≥ 100% (1 year)
✔ Leverage Ratio ≥ 3%
✔ Applies to all commercial banks
✔ Extra capital = D-SIBs like SBI
✔ Improves financial stability & crisis readiness
MOST IMPORTANT MCQs – BASEL III
📍 CHAPTER 1: BASICS OF BASEL III (10 MCQs)
Q1. Basel III framework was introduced mainly in response to which global event?
a) Dot-com bubble crash
b) 2008 Global Financial Crisis
c) 9/11 Attacks
d) COVID-19 Pandemic
Answer: b) 2008 Global Financial Crisis
Explanation: Basel III addressed weaknesses exposed during the 2008 crisis. 👉 (HIGHLY IMPORTANT)
Q2. Basel III is issued by:
a) IMF
b) World Bank
c) Basel Committee on Banking Supervision
d) BIS Monetary Council
Answer: c) Basel Committee on Banking Supervision
Explanation: BCBS is headquartered at BIS, Switzerland. 👉 (HIGHLY IMPORTANT)
Q3. The main objective of Basel III is:
a) Promote foreign investment
b) Increase cash transactions
c) Improve banking sector stability and reduce failure risk
d) Increase employment in banking
Answer: c) Improve banking sector stability and reduce failure risk
Q4. Basel III focuses on which three critical parameters?
a) Profit, Customer Count, NPA
b) Capital, Liquidity, Leverage
c) CASA, CAR, CRR
d) ATM, Cards, Cheques
Answer: b) Capital, Liquidity, Leverage 👉 (HIGHLY IMPORTANT)
Explanation: These control ability to absorb shocks.
Q5. Basel III guidelines apply to:
a) Only NBFCs
b) All scheduled commercial banks
c) Only foreign banks
d) Only rural banks
Answer: b) All scheduled commercial banks
Q6. The full form of RWA in Basel norms is:
a) Risk Weighted Assets
b) Reserve Weighted Allocation
c) Regional Wealth Assets
d) Real Worth Accounting
Answer: a) Risk Weighted Assets
Explanation: Riskier assets require more capital.
Q7. Capital adequacy refers to:
a) Total loans issued by bank
b) Minimum capital banks must maintain to absorb losses
c) Total deposits collected
d) Bank’s annual profit
Answer: b) Minimum capital banks must maintain to absorb losses
Q8. Basel III succeeded which previous Basel standard?
a) Basel 0
b) Basel I
c) Basel II
d) Basel IV
Answer: c) Basel II
Q9. Capital structure under Basel III consists of:
a) Tier 1 and Tier 2
b) Working capital & fixed capital
c) Rural and Urban capital
d) Loans and Advances
Answer: a) Tier 1 and Tier 2
Q10. The highest quality capital under Basel III is:
a) Tier 2
b) AT-1
c) CET-1
d) Subordinated loans
Answer: c) CET-1 (Common Equity Tier 1) 👉 (HIGHLY IMPORTANT)
📍 CHAPTER 2: CAPITAL REQUIREMENTS & BUFFERS (15 MCQs)
Q11. Minimum CET-1 capital ratio under Basel III is:
a) 2%
b) 3%
c) 4.5%
d) 6.5%
Answer: c) 4.5%
Q12. Minimum Tier 1 capital requirement under Basel III is:
a) 4%
b) 6%
c) 8%
d) 10%
Answer: b) 6%
Q13. Total minimum capital ratio (Tier 1 + Tier 2) without buffers is:
a) 6%
b) 8%
c) 10%
d) 12%
Answer: b) 8%
Q14. Capital Conservation Buffer (CCB) under Basel III is:
a) 0.5%
b) 1.5%
c) 2.5%
d) 4.5%
Answer: c) 2.5%
Q15. Total minimum regulatory capital including CCB is:
a) 8.5%
b) 10.5%
c) 12%
d) 15%
Answer: b) 10.5% 👉 (HIGHLY IMPORTANT)
Q16. Counter Cyclical Buffer range is:
a) 0–1%
b) 0–2.5%
c) 2%–5%
d) 5%–10%
Answer: b) 0–2.5%
Q17. Additional buffer for Systemically Important Banks (SIBs) is required because:
a) They are close to customers
b) Their failure affects the entire economy
c) They handle foreign exchange
d) They have agricultural lending
Answer: b) Their failure affects the entire economy
Q18. Which Indian bank is classified as D-SIB requiring additional capital buffer?
a) PNB
b) SBI
c) IDBI Bank
d) Indian Bank
Answer: b) SBI 👉 (HIGHLY IMPORTANT)
Q19. AT1 capital includes:
a) Common equity shares
b) Perpetual non-cumulative preference shares
c) Revaluation reserves
d) Govt. securities
Answer: b) Perpetual non-cumulative preference shares
Q20. Tier 2 capital mainly includes:
a) Cash
b) Subordinated debt & revaluation reserves
c) CASA balances
d) Gold reserves
Answer: b) Subordinated debt & revaluation reserves
Q21. Capital adequacy ratio (CAR) minimum level under Basel III in India is:
a) 6%
b) 8%
c) 9%
d) 10%
Answer: c) 9% (India-specific) 👉 (HIGHLY IMPORTANT)
Q22. Capital adequacy ensures:
a) Banks keep extra vault cash
b) Banks absorb unexpected losses
c) Customers get higher FD rates
d) Bank staff incentives increase
Answer: b) Banks absorb unexpected losses
Q23. Which instrument can convert into equity during stress as per Basel III?
a) FCNR
b) CRR deposit
c) AT1 Bonds
d) Cheque book
Answer: c) AT1 Bonds
Q24. CET-1 Ratio Formula:
a) CET1 / Total Assets
b) CET1 / Risk Weighted Assets
c) Tier 1 / Equity
d) Tier 2 / Liquidity
Answer: b) CET1 / Risk Weighted Assets
Q25. Risk-weighted assets are:
a) All assets valued equally
b) Assets weighted by risk level
c) Only cash assets
d) Only public sector assets
Answer: b) Assets weighted by risk level
📍 CHAPTER 3: LIQUIDITY & LEVERAGE REQUIREMENTS (15 MCQs)
Q26. LCR under Basel III stands for:
a) Liquidity Carry Ratio
b) Liquidity Coverage Ratio
c) Loan Conversion Ratio
d) Lowest Cash Reserve
Answer: b) Liquidity Coverage Ratio 👉 (HIGHLY IMPORTANT)
Q27. LCR ensures:
a) Bank retains more branches
b) Bank maintains enough liquid assets to survive 30-day stress
c) Customers get more loans
d) Employees get higher salary
Answer: b) Bank maintains enough liquid assets to survive 30-day stress
Q28. NSFR stands for:
a) Net Stable Funding Ratio
b) National Savings Fund Reserve
c) Net Securities Fund Ratio
d) Network Stable Finance Ratio
Answer: a) Net Stable Funding Ratio
Q29. NSFR requirement ensures stability for:
a) 24 hours
b) 7 days
c) 30 days
d) 1 year
Answer: d) 1 year
Q30. Minimum required LCR and NSFR under Basel III is:
a) 75%
b) 90%
c) 100%
d) 150%
Answer: c) 100% 👉 (HIGHLY IMPORTANT)
Q31. Leverage Ratio under Basel III must be at least:
a) 1%
b) 2%
c) 3%
d) 12%
Answer: c) 3%
Q32. Leverage Ratio Formula:
a) Tier 1 Capital / Total Exposure
b) Tier 2 / Total Liabilities
c) CET1 / Loans Issued
d) AT1 / Total Assets
Answer: a) Tier 1 Capital / Total Exposure
Q33. The purpose of leverage ratio is to:
a) Increase bank profitability
b) Prevent excessive borrowing
c) Increase lending to agriculture
d) Expand ATM network
Answer: b) Prevent excessive borrowing
Q34. High leverage means:
a) Lower financial risk
b) Higher financial risk due to more debt
c) More liquidity
d) Higher profitability
Answer: b) Higher financial risk due to more debt
Q35. Liquidity standards prevent:
a) Employee transfers
b) Cash crunch & run-on-the-bank situations
c) Fake currency circulation
d) Expansion of customer base
Answer: b) Cash crunch & run-on-the-bank situations
📍 CHAPTER 4: RECENT DEVELOPMENTS & INDIA SPECIFIC (10 MCQs)
Q36. Basel III implementation deadline in India was extended due to:
a) Inflation
b) COVID-19 financial stress
c) Change in government
d) Demonetisation
Answer: b) COVID-19 financial stress
Q37. RBI regulates Basel III norms under:
a) FEMA Act
b) Banking Regulation Act
c) Companies Act
d) Payment & Settlement Act
Answer: b) Banking Regulation Act
Q38. Domestic Systemically Important Banks (D-SIBs) in India include:
a) HDFC Bank, ICICI Bank, SBI
b) UCO Bank & IOB
c) Indian Bank & BOI
d) AXIS & PNB only
Answer: a) HDFC Bank, ICICI Bank, SBI
Q39. Basel standards are named after:
a) Sweden
b) Switzerland
c) Germany
d) Norway
Answer: b) Switzerland
Explanation: City of Basel, Switzerland.
Q40. Primary advantage of Basel III:
a) Reduces credit risk significantly
b) Increases bank operational cost
c) Reduces staff requirement
d) Promotes corruption-free banking
Answer: a) Reduces credit risk significantly
Q41. Main disadvantage of Basel III:
a) Encourages NPAs
b) Reduces lending capacity due to higher capital
c) Encourages inflation
d) Reduces customer deposits
Answer: b) Reduces lending capacity due to higher capital
Q42. Basel III impacts customers by:
a) Increasing ATM charges
b) Strengthening deposit safety
c) Removing cheque facilities
d) Restricting debit cards
Answer: b) Strengthening deposit safety
Q43. Which Basel requirement is used during economic boom periods to slow excessive credit growth?
a) CCB
b) Countercyclical Buffer
c) NSFR
d) AT1
Answer: b) Countercyclical Buffer 👉 (HIGHLY IMPORTANT)
Q44. Basel III increases focus on:
a) Market discipline and transparency
b) Reducing bank technology usage
c) Removing capital adequacy
d) Increasing branch count
Answer: a) Market discipline and transparency
Q45. Basel III is effective in India through:
a) RBI notifications
b) SEBI circular
c) IRDA guidelines
d) TRAI orders
Answer: a) RBI notifications
Q46. A bank failing Basel III requirements may face:
a) Temporary restrictions on lending & dividend payout
b) Promotion of staff
c) Increase in interest earnings
d) Merger with telecom companies
Answer: a) Temporary restrictions on lending & dividend payout
Q47. Basel III emphasises “loss absorption” ability mainly through:
a) Tier 1 capital
b) Tier 2 capital only
c) Deposits
d) Investments
Answer: a) Tier 1 capital
Q48. The Basel III reform package was finalised in:
a) 2005
b) 2008
c) 2010
d) 2020
Answer: c) 2010
Q49. Basel III norms are mandatory for:
a) Public sector banks only
b) All commercial banks including foreign banks
c) NBFCs exclusively
d) Payment banks only
Answer: b) All commercial banks including foreign banks
Q50. Basel IV is expected to:
a) Replace Basel III fully
b) Strengthen Basel III requirements further
c) Remove capital requirements
d) Reduce liquidity ratio
Answer: b) Strengthen Basel III requirements further
Explanation: Basel IV is final reform phase, enhancing risk calculation rules. 👉 (HIGHLY IMPORTANT)