# Basel III: What It Is, Capital Requirements, and Implementation

> **Definition**
>
> Basel III is an international regulatory accord for reforms designed to mitigate risk within the international banking sector by requiring banks to have more capital on hand.

## What Is Basel III?

Basel III Endgame is the last stage of U.S. regulators' implementation of reforms meant to ensure the stability of the banking system. It calls for the country's largest banks to put aside more capital in reserve to weather financial storms.

The banking industry has depicted the reforms as a threat to the American economy. It's amassed an army of lobbyists in Washington D.C. and poured millions into a media campaign to denounce the proposed regulations in a lobbying blitz that Basel III's supporters have called "unprecedented,"

### Key Takeaways

*   Basel III is an international regulatory accord designed to improve the regulation, supervision, and risk management of the banking sector.
*   A consortium of central banks from 28 countries devised Basel III in 2009 in response to the financial crisis of 2007–2008 and the subsequent economic recession.
*   Basel III is part of an evolving framework that adapts to changes in national economies and the financial landscape.
*   Basel III Endgame is set to end in 2024 with the regulations to take effect in mid-2025 but there may be some delay.

![Basel III](https://www.investopedia.com/thmb/6U0UTpEvQ2XO2G-bqblcTmDXXEI=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/basell-iii-final-dac3d358ac6847b2b8387ba62d15eb26.jpg)

*— Investopedia / Sydney Burns*

## How Basel III Works

The Basel regulations date back to the wake of the 2007-to-2009 financial crisis when financial watchdogs worldwide met to discuss ways to avoid a similar catastrophe.

They agreed through the Basel Committee on Banking Supervision in 2009 to develop minimum capital, leverage, and liquidity requirements to ensure that major banks could survive another upheaval. The final components of Basel III are known as Basel III Endgame in the United States. They're set to be implemented by regulators at the Federal Reserve, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency.

Lobbies including the Bank Policy Institute have taken to the airwaves and online warning that the suggested regulations target only about 37 U.S. banks with holdings of $100 billion in assets or more. They would put young families' dreams of homeownership and small businesses' expansion plans at risk.

The banks claim the reforms wouldn't make them any more stable and would have knock-on effects on their ability to lend funds to those with less credit. This would include minorities who have historically faced problems obtaining credit from American financial institutions.

## Basel III Updates

Federal regulators were already backtracking on their initial proposals from 2023 soon after the end of the commentary period in early 2024. This made the rules defenders furious. "When the heat was on last year, you talked a lot about getting tougher on the banks," U.S. Senator Elizabeth Warren told Jerome Powell, chair of the Federal Reserve, during a March 7, 2024, Congressional hearing. "Now the giant banks are unhappy about that, and you've gone weak-kneed on this."

The final regulations are set to be released to take effect on July 1, 2025. A three-year phase-in of the regulations would begin at that time.

Moody's has reported, however, that this timeline is expected to be delayed due to the unresolved contention surrounding so many aspects of the regulations. The Bank of England also announced in January 2025 that it intended to push back implementation of the rules until January 2027 to see whether the U.S. would change its stance under President Trump.

## A Deeper Dive Into Basel III

Basel III was rolled out by the [Basel Committee on Banking Supervision](https://www.investopedia.com/terms/b/baselcommittee.asp), a consortium of central banks from 28 countries based in Basel, Switzerland, shortly after the financial crisis of 2007–2008. Many banks were overleveraged and undercapitalized during this period despite earlier reforms known as Basel I and Basel II.

Also called the Third Basel Accord, Basel III is a continuing effort to strengthen an international banking framework that began in 1975.

### Basel I and Basel II

The [Basel I and Basel II accords](https://www.investopedia.com/terms/b/basel_accord.asp) were aimed at improving the banking system’s ability to deal with financial stress, improve risk management, and promote transparency. The first Basel Accords were introduced in 1988 and came on the heels of that decade’s debt crises in Latin America.

Basel I required that banks hold 8% of their risk-weighted assets as a buffer against potential losses. This was a significant step in ensuring that banks had enough financial strength to withstand losses and that they didn’t jeopardize the rest of the financial system.

Further measures were deemed necessary following Basel I and the many changes in the financial markets in the dot-com era. This led to Basel II in 2004. Basel II introduced more sophisticated models for calculating risk, expanding beyond credit risk to account for [operational](https://www.investopedia.com/terms/o/operational_risk.asp) and market risks such as losses due to changes in market prices. Basel II also encouraged banks to build their own internal models to better assess the specific risks they faced.

It wasn't long before the approach of Basel II appeared outdated given the banking storms of the 2007–2008 period. The transition from Basel II to Basel III marked a significant shift in the global approach to banking regulation. Basel II focused primarily on the amount of capital the banks held and how they managed risk but Basel III included new rules on liquidity, leverage, and [systemic risk](https://www.investopedia.com/ask/answers/09/systemic-systematic-risk.asp) factors.

### Basel III Delays

Many parts of Basel III are already in place worldwide, including the U.S. The final changes, called Basel III Endgame and agreed upon in 2017, were delayed for years by the COVID-19 pandemic and by banks calling for more time to adjust to and lobby against the new regulations.

Deadlines have come and gone with July 1, 2025 being the latest date set for when the rules are supposed to go into effect in the U.S. That date isn't firm, however. It would entail announcing them months earlier to provide regulators, banks, and other stakeholders with time to prepare to meet the new standards to have them fully in place three years later.

Basel III Endgame includes updates as to how banks calculate the risk of people not paying back their loans, how they use their internal models to determine how much money they need to keep in reserve, and how they should handle operational risks like fraud or system failures.  

## Minimum Capital Requirements Under Basel III

Banks have two main silos of capital to work with.

[Tier 1](https://www.investopedia.com/terms/t/tier1capital.asp) is a bank’s core capital, equity, and reserves that appear on the bank’s financial statements. Tier 1 capital is what can allow it to weather stress and keep its doors open if a bank experiences significant losses,

[Tier 2](https://www.investopedia.com/terms/t/tier2capital.asp) refers to a bank’s supplementary capital such as undisclosed reserves and unsecured subordinated debt instruments. Tier 1 capital is more liquid and more secure than Tier 2 capital. Common equity Tier 1 (CET1) includes the money banks get when they issue stock and the profits they hold onto instead of paying out to shareholders.

Banks with over $100 billion in assets would have to keep more money in their reserves under the proposed Basel III Endgame to cover potential losses. The new rules would allow banks to calculate the riskiness of assets such as loans and investments in multiple ways. They’d have to use whichever method puts more capital aside to err on the side of safety and stability.

Big banks would also have to keep a minimum level of capital as a proportion of all their assets including items that aren’t on their main balance sheet, not just risky ones. Regulators could make banks hold even more capital to prepare for a possible downturn if the economy is doing well. Banks would also need a minimum of 6% of their risky assets in Tier 1 capital including CET1 and a few other super-safe investments.

> **Important**
>
> The minimum for total capital (Tier 1 plus Tier 2, which is slightly riskier) would stay at 8%.

The total capital ratio (Tier 1 + Tier 2) remains at 8% as it’s been since Basel I but the composition of what banks can use as that capital is changing with a greater emphasis on higher-quality forms of capital. It’s also changing what it’s a percentage of, removing any consideration of riskier capital, [Tier 3](https://www.investopedia.com/terms/t/tier3capital.asp), from the calculation. The way banks calculate their [risk-weighted assets](https://www.investopedia.com/ask/answers/051415/what-formula-calculating-capital-risk-weight-assets-ratio-bank.asp) (the denominator or bottom figure in the capital ratios) would change.

The 8% figure might look the same but the changes to the capital ratios' numerator and denominator and new buffer requirements mean that Basel III Endgame would increase capital requirements for the banks targeted by these regulations. Estimates have varied with the higher ones coming from the banking lobby but the largest banks would have to increase the amount of capital they have on hand by up to 20% over what they normally keep in reserve.

### Capital Buffers to Weather Financial Storms

Basel III introduces new capital buffer requirements that banks must maintain above the minimum capital ratios. These buffers are designed to ensure that banks build up capital reserves during good times that they can draw down during economic and financial stress periods.

1.  **Capital conservation buffer (CCB)**: The proposal requires banks to maintain a CCB of 2.5% of risk-weighted assets with only CET1 capital. This buffer is in addition to the minimum CET1 ratio of 4.5%, effectively raising the CET1 requirement to 7%. Banks that dip into their CCB face restrictions on dividend payouts, share buybacks, and discretionary bonus payments to ensure that they have this on hand.
2.  **Countercyclical capital buffer (CCyB)**: Regulators can require banks to hold additional capital during periods of excessive credit growth. If triggered, the proposal would apply the CCyB to all banks with $100 billion or more in assets. The CCyB can range from 0% to 2.5% of risk-weighted assets and is intended to be released during times of stress to help banks continue lending. Countercyclical capital buffers must also consist entirely of Tier 1 assets.
3.  **Global systemically important bank (G-SIB) surcharge**: The proposal keeps in place a risk-based capital surcharge for G-SIBs. This extra capital buffer, ranging from 1% to 3.5% of risk-weighted assets, is designed to cut the risks these large, interconnected banks pose to the financial system.

### Leverage and Liquidity Measures

Basel III also introduces new [leverage](https://www.investopedia.com/terms/l/leverage.asp) and liquidity requirements to protect against excessive and risky lending while ensuring that banks have enough liquidity during periods of financial stress. It sets a higher leverage ratio for G-SIBs. The ratio is Tier 1 capital divided by the bank’s total assets with a minimum ratio requirement of 3%.

Basel III additionally has new liquidity rules. A liquidity coverage ratio requires that banks hold a “sufficient reserve of high-quality liquid assets (HQLA) to allow them to survive a period of significant liquidity stress lasting 30 calendar days.” HQLA includes cash, central bank reserves, and certain government securities that can be easily converted to cash with little or no loss of value.

Another liquidity-related provision is the net stable funding (NSF) ratio which compares the bank’s “available stable funding” (essentially capital and liabilities with a time horizon of more than one year) with the amount of stable funding that it must hold based on the liquidity, outstanding [maturities](https://www.investopedia.com/terms/m/maturity.asp), and risk level of its assets.

A bank’s NSF ratio must be at least 100%. The aim is to create “incentives for banks to fund their activities with more stable sources of funding on an ongoing basis” rather than load up their balance sheets with “relatively cheap and abundant short-term wholesale funding.”  

## Why It Matters to Investors

The complexities of bank capital regulations may seem far removed from the everyday concerns of retail investors but the Basel III Endgame proposal has important implications for the broader economy and financial markets.  

*   **Confidence in the financial system**: A more resilient banking system is better positioned to continue lending during economic downturns which could help mitigate the severity and duration of recessions. This increased confidence could contribute to more stable financial markets which benefits all investors.
*   **Economic growth**: Banks play a vital role in supporting economic growth by lending to businesses and consumers. Critics of Basel III Endgame argue that the higher capital requirements would lead some banks to cut their lending activities, however, and this would slow economic growth in the short term. They would have to keep more of their capital on hand and their lending would slow. Proponents of the plan have pointed to studies that show that banks might lend more with more of a cushion to backstop their lending activities, however, in the same way having more savings might make you less reluctant to lend to a family member. Others say any influence would be modest at best.
*   **Financial stability**: The Basel III Endgame rules aim to make the banking system more resilient to economic shocks by requiring banks to hold more high-quality capital and maintain stronger liquidity positions. A durable banking system is crucial for the smooth functioning of the economy, ensuring that businesses and individuals have access to credit and financial services. A more stable financial system reduces the risk of severe market disruptions that would impact investors' portfolios.

The Basel III Endgame rules primarily aim to strengthen the banking system but their effects would ripple through the entire economy.  

## What Impact Would Basel III Have on the Profits of the Big Banks?

It's reasonable to assume that banks think it will hurt their bottom line. Higher [capital requirements](https://www.investopedia.com/terms/c/capitalrequirement.asp) can affect bank profitability because banks may need more capital in reserve instead of using it to generate returns. This could influence bank stock valuations and dividend payouts in turn, which would be scrutinized if they didn't meet some of the capital requirements.

Better-capitalized banks may be viewed as safer investments, however. This could attract more investors over the long term and some research has suggested that they could do better financially, too.

## What Effect Would Basel III Have on Small and Medium-Sized Banks?

Basel III primarily targets very large, internationally active banks but critics charge that its regulations would also affect small and medium-sized banks. This has been the focus of much of the advertising campaign around the issue.

These banks may face increased operational costs because the banks they work with would face higher costs. Federal regulators have said this isn't the case, however, and the framework allows for some flexibility. It recognizes the risk profiles and business models of smaller banks.

## When Does Basel III Go Into Effect?

We can report the deadlines U.S. regulators have given but a "wait and see" approach might be in order. Bank requests for more time to digest and comment on the plans, COVID-19, and shifts in the post-pandemic economy have all pushed back the deadlines. The regulations should start taking effect July 1, 2025, followed by a three-year phase-in period to give banks time to transition to the new rules, but there are indications that this could be delayed.

## The Bottom Line

The global financial crisis of 2007-2008 exposed critical weaknesses in the banking system, highlighting the need for more robust market protections. Enter Basel III, a comprehensive set of international banking reforms designed to fortify banks against future shocks.

Stakeholders continue to debate its requirements as the 2028 deadline for full implementation approaches and what's needed to safeguard the economy against the systemic risk destabilized banks have presented in past crises.  

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