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====== Basel III explained ======

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Basel III is a set of international banking regulations and standards developed by the Basel Committee on Banking Supervision (BCBS). The primary goal of Basel III is to enhance the stability and resilience of the global banking system by strengthening the regulatory framework that governs banks' capital adequacy, liquidity management, and risk management practices. It builds upon the earlier Basel I and Basel II accords and addresses some of the weaknesses and lessons learned from the global financial crisis of 2007-2008.

Key components and objectives of Basel III include:

1. **Capital Adequacy:** Basel III sets more stringent capital requirements for banks. It introduces a common equity Tier 1 (CET1) capital ratio, requiring banks to maintain a higher proportion of high-quality, common equity capital in relation to their risk-weighted assets. This is intended to provide a buffer against unexpected losses.

2. **Leverage Ratio:** Basel III introduces a leverage ratio, which is a non-risk-based measure of capital adequacy. It aims to prevent excessive leverage by setting a minimum capital requirement based on a bank's total exposure.

3. **Liquidity Risk Management:** Basel III introduces two liquidity standards: the Liquidity Coverage Ratio (LCR) and the Net Stable Funding Ratio (NSFR). The LCR requires banks to hold sufficient high-quality liquid assets to cover their short-term liquidity needs under stressed conditions. The NSFR encourages banks to use stable funding sources for their longer-term assets, reducing the risk of liquidity shortfalls.

4. **Counterparty Credit Risk:** Basel III includes measures to strengthen the capital requirements for counterparty credit risk exposure arising from derivatives, securities financing transactions, and other trading activities.

5. **Systemically Important Banks:** The accord introduces additional capital requirements for globally systemically important banks (G-SIBs) to mitigate the risks posed by large, complex financial institutions. G-SIBs are subject to higher capital buffers and more intense supervisory scrutiny.

6. **Risk Management and Governance:** Basel III emphasizes the importance of effective risk management, corporate governance, and risk culture within banks. It encourages banks to have comprehensive risk assessment processes and improved risk data aggregation capabilities.

7. **Enhanced Disclosure:** Banks are required to provide more transparent and consistent information to regulators and the public about their capital, risk exposures, and risk management practices.

8. **Transitional Arrangements:** Basel III includes transitional arrangements to give banks time to adapt to the new capital and liquidity standards gradually.

Basel III was developed in response to the global financial crisis, which highlighted weaknesses in the banking industry's capital and liquidity positions. The regulations aim to make banks more resilient to economic downturns and financial crises, reduce the likelihood of bank failures, and protect depositors and the broader financial system.

Basel III has been adopted by many countries and regions around the world, often with some customization and adaptation to local banking systems and regulations. It represents a significant step toward strengthening the stability and soundness of the global banking industry.