Japan’s Commitment to Basel III Implementation Reinforced Amid Recent Banking Turmoil

The Central Bank Governors and Heads of Supervision Group, the top body of the Basel Committee on Banking Supervision, released a press release on September 11, titled “Central Bank Governors and Heads of Supervision Group Approve Measures to Address Recent Banking Turmoil and Reaffirm Priority on Basel III Implementation.”

For more details, please refer to the following.

Read the Original Press Release (Link to the Bank for International Settlements Website) (Translation: PDF 127KB)

Basel III is an international regulatory framework for banking supervision. It was developed by the Basel Committee on Banking Supervision (BCBS), which is part of the Bank for International Settlements (BIS). Basel III builds upon the earlier Basel I and Basel II frameworks and was introduced to enhance the stability and resilience of the global banking system.

Here are some key components and objectives of Basel III:

  1. Capital Adequacy: Basel III requires banks to maintain higher levels of capital to withstand financial stress and economic downturns. It introduced a new capital requirement known as Common Equity Tier 1 (CET1) capital, which includes high-quality common equity that can absorb losses.
  2. Liquidity Requirements: It includes new liquidity standards to ensure that banks have enough liquid assets to meet their short-term obligations, especially during periods of financial stress. The Liquidity Coverage Ratio (LCR) and the Net Stable Funding Ratio (NSFR) are two key liquidity requirements.
  3. Leverage Ratio: Basel III introduced a leverage ratio to limit the buildup of excessive leverage in the banking system. It measures a bank’s capital in relation to its total exposure.
  4. Counterparty Credit Risk: It introduces changes to the calculation of capital requirements for counterparty credit risk, especially for derivatives and other complex financial instruments.
  5. Systemically Important Banks: Basel III addresses the issue of “systemically important banks” (often referred to as “too big to fail”) by requiring these banks to hold additional capital and meet more stringent regulatory requirements.
  6. Macroprudential Regulation: It encourages regulators to take a more macroprudential approach to regulation, meaning they consider the overall stability of the financial system when setting regulations.

The primary goal of Basel III is to strengthen the banking sector’s ability to absorb shocks arising from financial and economic stress, thus reducing the risk of a banking crisis similar to the one that occurred during the global financial crisis of 2007-2008. Basel III has been adopted by many countries and jurisdictions as part of their regulatory framework for banks, although specific implementation may vary from one jurisdiction to another.