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BASEL III - A comparison of Basic criteria with Basel II

The Basel Committee on Banking Supervision (BCBS) issued a comprehensive reform package entitled “Basel III: A global regulatory framework for more resilient banks and banking systems” in December 2010, with the objective to improve the banking sector’s ability to absorb shocks arising from financial and economic stress, whatever the source, thus reducing the risk of spillover from the financial sector to the real economy. The reform package relating to capital regulation, together with the enhancements to Basel II framework and amendments to market risk framework issued by BCBS in July 2009, will amend certain provisions of the existing Basel II framework, in addition to introducing some new concepts and requirements. Here we are giving you the comparison of provisions of both Basel II and III so that you people be able to know what are those major changes in new guidelines:

Basel II

Basel III

1. A banks capital comprises of Tier 1 and Tier 2 capital with a restriction that Tier 2 capital cannot be more than 100% of Tier 1 capital.


1. With a view to improving the quality of capital, the Tier 1 capital will predominantly consist of Common Equity.

Common equity means: Tier 1 Capital (going-concern capital)

(a) Common Equity Tier 1 

(b)  Additional Tier 1.

Add to above Tier 2 capital to have MCR (minimum capital requirement) of 9% CRAR.  


2. Within Tier 1 capital, innovative instruments are limited to 15% of Tier 1 capital.


2. Common Equity Tier 1(CET1) capital must be at least 5.5% of risk weighted assets (RWAs) i.e. for credit risk + market risk + operational risk on an ongoing basis. 

Additional Tier 1 capital can be admitted maximum at 1.5% of RWAs. That means

Tier 1 capital must be at least 7% of RWAs on an ongoing basis. 


3. . Thus the minimum capital requirement will be of 9% of CRAR will be of

                       Tier I + Tier II

Risk weighted assets for credit risk + Market Risk + Operational risk


3. Banks are also required to maintain a capital conservation buffer (CCB) of 2.5% of RWAs in the form of Common Equity Tier 1 capital.

Thus as per Basel III the MCR will be as follows:

Minimum Common Equity Tier 1 ratio   5.5%

Add:- Capital conservation buffer          2.5%

 (comprised of Common Equity)

Add:-Additional Tier I  capital                1.5%

Add:- Tier 2 capital                                2.0%

Minimum total capital Ratio plus         11.5%

Capital conservation buffer.


Total Capital (Tier 1 Capital plus Tier 2 Capital) must be at least 9% of RWAs on an ongoing basis. Thus, within the minimum CRAR of 9%, Tier 2 capital can be admitted maximum up to 2%.


4. Tier I comprises of:

The aggregate of paid-up capital, statutory reserves; and other disclosed free reserves including share premium and capital reserves arising out of surplus on sale of assets As reduced by :

a. equity investments in subsidiaries;

b. intangible assets

c. current and brought forward losses.


4. The Common Equity component of Tier 1 capital will comprise the following:

(i) Common shares (paid-up equity capital) issued by the bank which meet the criteria for classification as common shares for regulatory purposes

(ii) Stock surplus (share premium) resulting from the issue of common shares; 

 (iii) Statutory reserves;

 (iv) Capital reserves representing surplus arising out of sale proceeds of assets; 

(v) Other disclosed free reserves, if any;

(vi) Balance in Profit & Loss Account at the end of the previous financial year; 

 (vii) Banks may reckon the profits in current financial year for CRAR calculation on a quarterly basis provided the incremental provisions made for non-performing assets at the end of any of the four quarters of the previous financial year have not deviated more than 25% from the average of the four quarters.

(viii) While calculating capital adequacy at the consolidated level, common shares issued by consolidated subsidiaries of the bank and held by third parties (i.e. minority interest) which meet the criteria for inclusion in Common Equity Tier 1 capital.

Less: Regulatory adjustments / deductions applied in the calculation of Common Equity Tier 1 capital.

a. Goodwill and all Other Intangible Assets

b. Deferred Tax Assets (DTAs)

c. Cash Flow Hedge Reserve

d. Shortfall of the Stock of Provisions to Expected Losses 

e. Gain-on-Sale Related to Securitisation Transactions

f. Cumulative Gains and Losses due to Changes  in Own Credit Risk on Fair Valued Financial Liabilities

g. Defined Benefit Pension Fund Assets and Liabilities

h. Investment in own shares (Treasury Stock)

i. Investment in the capital of banking,                                         

Financial and Insurance Entities


5. Perpetual Non-Cumulative Preference Shares along with Innovative Tier 1 instruments should not exceed 40% of total Tier 1 capital at any point of time.


5. Additional Tier 1 capital includes:

a. Perpetual Non-Cumulative Preference Shares

b. Perpetual Debt instruments as bonds or debentures.

Note:-Perpetual Debt Instruments (PDI) together with Perpetual Non-Cumulative Preference Shares (PNCPS) in Additional Tier 1 Capital, more than 1.5% of risk weighted assets.

c. Stock surplus (share premium) resulting from the issue of instruments included in Additional Tier 1 capital; 

d. Any other type of instrument generally notified by the Reserve Bank from time to time for inclusion in Additional Tier 1 capital;

Less:Regulatory adjustments / deductions applied in the calculation of Additional Tier 1 capital.


6. Within Tier 2 capital, subordinated debt is limited to a maximum of 50% of Tier 1 capital.


6. Elements of Tier 2 capital will largely remain the same under existing guidelines except that there will be no separate Tier 2 debt capital instruments in the form of Upper Tier 2 and subordinated debt. Instead, there will be a single set of criteria governing all Tier 2 debt capital instruments.


 As regards the other aspects like credit risk weight factor we will update this article shortly….

Article Category - Banking

Posted Date - 2012/06/19