Basel III: Capital and Liquidity Rules
After 2008, the Basel III accords raised both the quantity and the quality of bank capital and added liquidity rules. Banks must hold more common equity against risk-weighted assets, keep capital buffers, and meet a liquidity coverage ratio so they can ride out a stress without a fire sale.
Why it matters
Thin, low-quality capital let banks amplify the crisis, so the response is simple in spirit. Make banks fund more of themselves with loss-absorbing equity and hold enough liquid assets to survive a panic.
Worked examples
What are the headline Basel III minimums a bank must meet?
A minimum total capital ratio of 8% of risk-weighted assets, with a common-equity tier-1 minimum of 4.5% plus a 2.5% conservation buffer on top, and a liquidity coverage ratio of at least 100% of stressed 30-day outflows.
Common mistakes
- ✗More capital just means cash sitting idle. Capital is a funding source, equity, not idle cash, and it absorbs losses so the bank fails less easily.
- ✗Basel III only raised capital. It also added liquidity rules like the liquidity coverage ratio, because 2008 was as much a liquidity run as a solvency problem.
Revision bullets
- •More and higher-quality capital vs risk-weighted assets
- •Capital buffers sit on top of the minimum
- •Liquidity coverage ratio for surviving stress
Quick check
A key addition of Basel III beyond raising capital was
Connected topics
Sources
- Mishkin (2018), Ch. 10Mishkin, F. S. The Economics of Money, Banking, and Financial Markets. 12th ed. Pearson, 2018. ISBN 978-1-292-26885-9.Capital requirements, the Basel Accords, and post-crisis financial regulation.