International financial regulators have eased rules on minimum quantities of cash and liquid assets all banks must hold, set to take effect in 2015. The agreement, by the body that oversees the Basel Committee on Banking Supervision, is an attempt to make banks less vulnerable to runs. The new “liquidity coverage ratio” will be phased in from 2015 and take full effect four years later.
- The Basel Committee on Banking Supervision provides a forum for regular cooperation on banking supervisory matters. Its objective is to enhance understanding of key supervisory issues and improve the quality of banking supervision worldwide.
- Basel is a set of standards and practices developed for global banks to ensure that they maintain adequate capital to withstand periods of economic strain. It is a comprehensive set of reform measures designed to improve the regulation, disclosures and risk management within the banking sector.
- Basel I norms was introduced in 1998, focused almost entirely on credit risk. It defined capital requirement and structure of risk weights for banks.
- Basel II was introduced in 2004, laid down guidelines for capital adequacy, risk management and disclosure requirements.
- It is widely felt that the shortcoming in Basel II norms is what led to the global financial crisis of 2008. That is because Basel II did not have any explicit regulation on the debt that banks could take on their books, and focused more on individual financial institutions, while ignoring systemic risk. To ensure that banks don’t take on excessive debt, and that they don’t rely too much on short term funds, Basel III norms were proposed in 2010.
- Basel III establishes tougher capital standards through more restrictive capital definitions, higher risk-weighted assets (RWA), additional capital buffers and higher requirements for minimum capital ratios. It also introduces new strict liquidity requirements.