The Basel Committee endorsed Basel III on 12 September. The package of reforms includes:
- increased capital requirements: the minimum requirement for common equity will increase from 2% before the application of regulatory adjustments to 4.5% after the application of stricter adjustments. This will phase in by 1 January 2015. The Tier 1 capital requirement, which includes common equity and other qualifying financial instruments based on stricter criteria, will increase from 4% to 6% over the same period;
- a capital conservation buffer above the regulatory minimum requirement, calibrated at 2.5% and met with common equity, after deductions;
- a countercyclical buffer within a range of 0% – 2.5% of common equity or other fully loss absorbing capital; and
- a non-risk-based leverage ratio.
Systemically important banks should have loss absorbing capacity beyond these standards.
Transitional arrangements will apply where relevant, to instruments issued before 12 September 2010) and include:
- national implementation beginning on 1 January 2013, from when banks will be required to meet the following new minimum requirements in relation to risk-weighted assets (RWAs):
- 3.5% common equity/RWAs;
- 4.5% Tier 1 capital/RWAs; and
- 8.0% total capital/RWAs.
- phasing in the minimum common equity and Tier 1 requirements between 1 January 2013 and 1 January 2015. On 1 January 2013, the minimum common equity requirement will be 3.5% and the Tier 1 capital requirement 4.5%. On 1 January 2014, the percentages rise to 4% and 5.5% respectively. On 1 January 2015, it will be 4.5% common equity and the 6% Tier 1. The total capital requirement stays at the current 8.0%. The difference between the total capital requirement of 8.0% and the Tier 1 requirement can be met with Tier 2 and higher forms of capital;
- beginning the regulatory adjustments at 20% of the required deductions from common equity on 1 January 2014 and increasing them by 20% each year to reach 100% on 1 January 2018;
- phasing in the capital conservation buffer between 1 January 2016 and year end 2018 and becoming fully effective on 1 January 2019. It will begin at 0.625% of RWAs;
- requiring banks that already meet the minimum ratio requirement during the transition period but remain below the 7% common equity target (minimum plus conservation buffer) to maintain prudent earnings retention policies with a view to meeting the conservation buffer as soon as reasonably possible; and
- excluding capital instruments that no longer qualify as common equity Tier 1 from common equity Tier 1 as of 1 January 2013. However, some instruments will be phased out over the same horizon described in the previous bullet point.