Overview[edit]
Unlike Basel I and Basel II, which focus primarily on the level of bank loss reserves that banks are required to hold, Basel III focuses primarily on the risk of a run on the bank by requiring differing levels of reserves for different forms of bank deposits and other borrowings. Therefore Basel III rules do not, for the most part, supersede the guidelines known as Basel I and Basel II; rather, it will work alongside them.

Key principles[edit]
Capital requirements[edit]
The original Basel III rule from 2010 was supposed to require banks to hold 4.5% of common equity (up from 2% in Basel II) and 6% of Tier I capital (including common equity and up from 4% in Basel II) of "risk-weighted assets" (RWAs).[3] Basel III introduced two additional "capital buffers"—a "mandatory capital conservation buffer" of 2.5% and a "discretionary counter-cyclical buffer" to allow national regulators to require up to an additional 2.5% of capital during periods of high credit growth.

Leverage ratio[edit]
Basel III introduced a minimum "leverage ratio". The leverage ratio was calculated by dividing Tier 1 capital by the bank's average total consolidated assets (not risk weighted);[4][5] The banks were expected to maintain a leverage ratio in excess of 3% under Basel III. In July 2013, the U.S. Federal Reserve announced that the minimum Basel III leverage ratio would be 6% for 8 Systemically important financial institution (SIFI) banks and 5% for their insured bank holding companies.[6]

Liquidity requirements[edit]
Basel III introduced two required liquidity ratios.[7] The "Liquidity Coverage Ratio" was supposed to require a bank to hold sufficient high-quality liquid assets to cover its total net cash outflows over 30 days; the Net Stable Funding Ratio was to require the available amount of stable funding to exceed the required amount of stable funding over a one-year period of extended stress.[8]

U.S. version of the Basel Liquidity Coverage Ratio requirements[edit]
On 24 October 2013, the Federal Reserve Board of Governors approved an interagency proposal for the U.S. version of the Basel Committee on Banking Supervision (BCBS)'s Liquidity Coverage Ratio (LCR). The ratio would apply to certain U.S. banking organizations and other systematically important financial institutions.[9] The comment period for the proposal is scheduled to close by 31 January 2014.

The United States' LCR proposal came out significantly tougher than BCBS’s version, especially for larger bank holding companies.[10] The proposal requires financial institutions and FSOC designated nonbank financial companies[11] to have an adequate stock of high-quality liquid assets (HQLA) that can be quickly liquidated to meet liquidity needs over a short period of time.

The LCR consists of two parts: the numerator is the value of HQLA, and the denominator consists of the total net cash outflows over a specified stress period (total expected cash outflows minus total expected cash inflows).[12]

The Liquidity Coverage Ratio applies to U.S. banking operations with assets of more than $10 billion. The proposal would require:

Large Bank Holding Companies (BHC) – those with over $250 billion in consolidated assets, or more in on-balance sheet foreign exposure, and to systemically important, non-bank financial institutions;[11] to hold enough HQLA to cover 30 days of net cash outflow. That amount would be determined based on the peak cumulative amount within the 30-day period.[9]
Regional firms (those with between $50 and $250 billion in assets) would be subject to a “modified” LCR at the (BHC) level only. The modified LCR requires the regional firms to hold enough HQLA to cover 21 days of net cash outflow. The net cash outflow parameters are 70% of those applicable to the larger institutions and do not include the requirement to calculate the peak cumulative outflows[12]
Smaller BHCs, those under $50 billion, would remain subject to the prevailing qualitative supervisory framework.[13]
The U.S. proposal divides qualifying HQLAs into three specific categories (Level 1, Level 2A, and Level 2B). Across the categories the combination of Level 2A and 2B assets cannot exceed 40% HQLA with 2B assets limited to a maximum of 15% of HQLA.[12]

Level 1 represents assets that are highly liquid (generally those risk-weighted at 0% under the Basel III standardized approach for capital) and receive no haircut. Notably, the Fed chose not to include GSE-issued securities in Level 1, despite industry lobbying, on the basis that they are not guaranteed by the "full faith and credit" of the U.S. government.
Level 2A assets generally include assets that would be subject to a 20% risk-weighting under Basel III and includes assets such as GSE-issued and -guaranteed securities. These assets would be subject to a 15% haircut which is similar to the treatment of such securities under the BCBS version.
Level 2B assets include corporate debt and equity securities and are subject to a 50% haircut. The BCBS and U.S. version treats equities in a similar manner, but corporate debt under the BCBS version is split between 2A and 2B based on public credit ratings, unlike the U.S. proposal. This treatment of corporate debt securities is the direct impact of the Dodd–Frank Act's Section 939, which removed references to credit ratings, and further evidences the conservative bias of U.S. regulators’ approach to the LCR.
The proposal requires that the LCR be at least equal to or greater than 1.0 and includes a multiyear transition period that would require: 80% compliance starting 1 January 2015, 90% compliance starting 1 January 2016, and 100% compliance starting 1 January 2017.[14]

Lastly, the proposal requires both sets of firms (large bank holding companies and regional firms) subject to the LCR requirements to submit remediation plans to U.S. regulators to address what actions would be taken if the LCR falls below 100% for three or more consecutive days.