UPSC Prelims 2015 Question:

Basel III Accord’ or simply ‘Basel III’, often seen in the news, seeks to

Explanation:

• The Basel III accord is a set of financial reforms that was developed by the Basel Committee on Banking Supervision (BCBS), with the aim of strengthening regulation, supervision, and risk management within the banking industry. Due to the impact of the 2008 Global Financial Crisis on banks, Basel III was introduced to improve the banks’ ability to handle shocks from financial stress and to strengthen their transparency and disclosure

Key Principles of Basel III

• The Basel III accord raised the minimum capital requirements for banks from 2% in Basel II to 4.5% of common equity, as a percentage of the bank’s risk-weighted assets. There is also an additional 2.5% buffer capital requirement that brings the total minimum requirement to 7%.
  
  
• Basel III introduced a non-risk-based leverage ratio to serve as a backstop to the risk-based capital requirements. Banks are required to hold a leverage ratio in excess of 3%.
   
• Basel III introduced the usage of two liquidity ratios – the Liquidity Coverage Ratio and the Net Stable Funding Ratio.
  
  

Therefore, option (2) is the correct answer.

Subject: Economics | Economic Organisations and Conventions