Basel III

Basel III is a now a global regulatory stanadard on bank capital adequacy and liquid agreed by the members of the basel committee on banking supervision . the third of the basel accord was deelop in a response to the deficiencies in financial regulation revealed by the global fianancial crises. Basel III strengthens bank capital requirement and introduces new regulatory requirements on bank liquidity and bank leverage. The Organisation for economics co-operation and development (OECD) estimates that the implementation of basel III will decrease annual GDP growth by 0.05 to 0.15 percent point. BaselIII will require banks to hold 4.5% fo common equity (up from 2% in basel II) AND 6% of tier I caoitak (up from 4% in basel II) of risk-weighted assets (RWA). BaselII also introduces additional capital buffers,(i) a mandatory capital conservation buffer of 2.5% and (ii) a discretionary counter-cyclical buffer ,which allows national regulators to require up to another 2.5% of capital during period of high credit growth. The liquidity coverage ratio requires a bank to hold sufficient high quantity liquid asset to cover its total net cash flow over 30 days; the stable funding ratio requires the available amount of stable funding to exceed the required amount of stable funding over a one year period of extended stress. Summary of proposed changes First the quality ,consistency an transpersancy of capital base will be raised. Tier 1 capital : the predominant form of tier 1capital must be common share and retained earnings. Tier 2 capital instrument will be harmonised. Tier 3 capital will be eliminated. Second the risk coverage of capital framework will be strengthened. Promote more integrated management of market and counterparty credit risk. Add the CAV(credit valuation adjustment )-risk due to deterioration in counterpartys credit Rating Strengthen the capital requirement for counterparty credit exposure arising from banks derivatives, repo and decurities financing transactions. Provide additional incentives to move OTC derivatives to central counterparties (probably clearing house ) Third, the committee will introduce a leverage ratio as a supplementary measure to the basel II risk-based framework.

The committee therefore is introducing a leverage ratio requirement that is intended to achieve the following objectives : The committee therefore is introducing a leverage ratio requirement that is intended to achieve the following objectives Put a floor under the build up of leverage in the banking sector Introduce additional safeguards against model risk and measurement error by supplementing the risk based measures with a simpler measures that is based on gross explosure. Fourth the committee is introducing a service of measures to promote the build up of capital buffers in good times that can be drawn upon in periods of stress (reducing procyclicality and promoting counter cyclical buffers)

Reforms in indian banking sector leads to increase competition between various industries such as banking, insurance, financial institutions and so on. It helps to enhance the economic growth of the country. Inclusion would also emerge as the key issues for a country like india, art this stage of socio-economic development.