John Kenneth Galbraith, famous Harvard Economist and the US Ambassador to India during J.F. Kennedy's Administration wrote. 'All Financial Crises are the result of Debt that, in one fashion or another, has become Dangero

Basel-III represents an effort to fix the gaps and lacunae in Basel-II that came to light during the crisis as also to reflect other lessons of the crisis. What is important though is that Basel-III does not jettison Basel-II; on the contrary, it builds on the essence of Basel-II, the link between the risk profiles and capital requirements of individual banks. In that sense, Basel-III is not a negation, but an enhancement of Basel-II. The enhancements of Basel-III over Basel-II come primarily in four areas: Augmentation in the level and quality of capital; Introduction of liquidity standards; Modifications in provisioning norms; and Better and more comprehensive disclosures. Capital Requirement under Basel-II and Basel-III Calculation Particulars As a percentage of risk weighted Assets Basel-II Basel-III (as on January 01, 2019) A=(B+D) Minimum Total Capital 8.0 8.0 B Minimum Tier-1 Capital 4.0 6.0 C Minimum Common Equity Tier-1 Capital 2.0 4.5 D Maximum Tier-2 Capital (within Total Capital) 4.0 2.0 E Capital Conservation Buffer (CCB) - 2.5 F=C+E Minimum Common Equity Tier-1 Capital + CCB 2.0 7.0 G=A+E Minimum Total Capital + CCB 8.0 10.5 As can be seen from the comparative data in Table above, Basel-III requires higher and better quality capital. The minimum total capital remains unchanged at 8 per cent of Risk Weighted Assets (RWA). However, Basel-III introduces a Capital Conservation Buffer (CCB) of 2.5 per cent of RWA over and above the minimum capital requirement, raising the total capital requirement to 10.5 per cent against 8 per cent under Basel-II. This Buffer is intended to ensure that banks are able to absorb losses without breaching the minimum capital requirement, and are able to carry on business even in a downturn without deleveraging. This buffer is not part of the regulatory minimum. However, the level of the buffer will determine the dividend distributed to shareholders and the bonus paid to staff. There are also other prescriptions regarding the quality of capital within the minimum total so that capital is able to absorb losses, and calling upon taxpayers to bear the burden of bail out becomes absolutely the last resort. In addition to the Capital Conservation Buffer, Basel-III introduces another capital buffer the Countercyclical Capital Buffer in the range of 0-2.5 per cent of RWA which could be imposed on Banks during periods of excess credit growth. Also, there is a provision for a higher capital surcharge on systemically important banks. To mitigate the Risk of Banks building up excess leverage as happened under Basel-II, Basel-III institutes a Leverage Ratio as a backstop to the risk based capital requirement. The Basel Committee is contemplating a Minimum Tier-1 Leverage Ratio of 3 per cent which will eventually become a Pillar-I requirement as of January 01, 2018. Basel-II failed to demand adequate loss absorbing capital to cover market risk. To remedy this, Basel-III strengthens the counterparty Credit Risk framework in market risk instruments. This includes the use of stressed input parameters to determine the capital requirement for counterparty Credit Default risk. Besides, there is a new capital requirement known as Credit Valuation Adjustment (CVA) risk capital charge for Over-The-Counter (OTC) derivatives to protect Banks against the risk of decline in the credit quality of the counterparty. To mitigate Liquidity Risk, Basel-III addresses both potential short-term liquidity stress and longer-term structural liquidity mismatches in Banks' Balance Sheets. To cover short-term liquidity stress, Banks will be required to maintain sufficient high-quality unencumbered liquid assets to withstand any stressed funding scenario over a 30-days horizon as measured by the Liquidity Coverage Ratio (LCR). To mitigate liquidity mismatches in the longer term, banks will be mandated to maintain a Net Stable Funding Ratio (NSFR). The NSFR mandates a minimum amount of stable sources of funding relative to the liquidity profile of the assets, as well as the potential for Contingent liquidity needs arising from off-balance sheet commitments over a one-year horizon. In essence, the NSFR is aimed at encouraging Banks to exploit stable sources of funding. Provisioning Norms The Basel Committee is supporting the proposal for adoption of an "expected loss" based measure of provisioning which captures actual losses more transparently and is also less pro cyclical than the current "incurred loss" approach. The expected loss approach for provisioning will make financial reporting more useful for all stakeholders, including regulators and supervisors. Disclosure Requirements The disclosures made by banks are important for market participants to make informed decisions. One of the lessons of the crisis is that the disclosures made by Banks on their risky exposures and on regulatory capital were neither appropriate nor sufficiently transparent to afford any comparative analysis. To remedy this, Basel-III requires banks to disclose all relevant details, including any regulatory adjustments, as regards the composition of the regulatory capital of the bank.