Previous Year Question
‘Basel III Accord’ or simply ‘Basel III’, often seen in the news, seeks to
develop national strategies for the conservation and sustainable use of biological diversity
improve banking sector’s ability to deal with financial and economic stress and improve risk management
reduce the greenhouse gas emissions but places a heavier burden on developed countries
transfer technology from developed countries to poor countries to enable them to replace the use of chlorofluorocarbons in refrigeration with harmless chemicals
Correct Answer: B
Detailed Solution
Basel III is an internationally agreed set of standards designed to strengthen the regulation, supervision and risk management of banks. It was developed by the Basel Committee on Banking Supervision—BCBS in response to the weaknesses revealed by the Global Financial Crisis of 2007–09.
The initial Basel III framework was issued in December 2010 and revised in June 2011.
It seeks to make banks more resilient against:
Sudden loan losses.
Financial-market stress.
Liquidity crises.
Excessive leverage.
Deposit withdrawals or disruption of wholesale funding.
Transmission of distress from a large bank to the broader financial system.
Major components of Basel III
1. Higher-quality capital
Banks must maintain more and better-quality capital to absorb losses. Common Equity Tier 1—CET1 constitutes the highest-quality component of regulatory capital.
The international Basel III minimum requirements are:
CET1: 4.5% of Risk-Weighted Assets
Tier 1 Capital: 6%
Total Regulatory Capital: 8%
2. Capital Conservation Buffer
Banks must normally maintain an additional 2.5% Capital Conservation Buffer—CCB in the form of CET1. The minimum total capital requirement combined with the CCB consequently becomes 10.5%.
If a bank’s buffer falls below the prescribed level, restrictions may be imposed on dividends, bonuses and other distributions.
3. Countercyclical Capital Buffer
A national regulator may impose an additional buffer of 0–2.5% when excessive credit growth is increasing systemic risk.
4. Leverage Ratio
The leverage ratio compares a bank’s Tier 1 capital with its total exposure without applying risk weights. It seeks to limit excessive borrowing and balance-sheet expansion. The Basel minimum is generally 3%.
5. Liquidity Coverage Ratio—LCR
A bank must possess sufficient High-Quality Liquid Assets to cover its expected net cash outflow during a severe 30-day liquidity-stress scenario. The full LCR requirement is 100%.
6. Net Stable Funding Ratio—NSFR
A bank must maintain sufficient stable funding relative to its assets and off-balance-sheet exposures over a one-year horizon. The minimum NSFR is 100%.
Basel III is unrelated to biodiversity conservation, climate-emission commitments or replacement of CFCs. Those matters relate respectively to the Convention on Biological Diversity, climate agreements and the Montreal Protocol. Therefore, the answer is (b).
Current position in India (2026)
The RBI has implemented Basel III-based capital and liquidity standards for Indian banks. The general minimum levels applicable to Indian scheduled commercial banks are more stringent than some international Basel minima:
Minimum CET1 ratio: 5.5%
Minimum Tier 1 capital ratio: 7%
Minimum Capital to Risk-Weighted Assets Ratio—CRAR: 9%
Capital Conservation Buffer: 2.5%
Combined CRAR and CCB requirement: 11.5%
This confirms that Basel III is intended to strengthen the banking sector’s capacity to withstand financial and economic stress and improve risk management.