Basel III Capital and Liquidity Standards

Capital Adequacy Requirements

(A) To improve the capital adequacy requirements, Basel III provides a minimum capital requirement for Core Tier 1 capital adequacy ratios and a general capital adequacy ratio. It introduces capital retention capital, enhancing the bank's ability to absorb losses during a recession, and establishes countercyclical excess capital linked to excessive credit growth intervals. Large banks must provide additional capital requirements to reduce the moral hazard of being "too big to fail."

Strict Capital Deduction Limits

(B) For minority gains, goodwill, deferred tax assets, and non-consolidated investments in common equity of financial institutions, capital requirements have changed. This includes unrealized gains on debt instruments, other investment assets, the difference between the provision amount and expected loss, and fixed-income pension fund assets and liabilities.

Expanding Coverage of Risky Assets

(C) To expand the coverage of risky assets, the framework raises capital requirements for "re-asset securitization risk exposure," increases the risk value under stress, and increases capital requirements for the trading business. It also increases requirements for OTC derivatives and Counterparty Credit Risk (CCR) for securities financing transactions (SFTs).

Introduction of the Leverage Ratio

(D) To ensure capital adequacy requirements reflect the expansion of total on- and off-balance sheet assets and to reduce the impact of capitalization through the conversion of capital requirements, the leverage ratio was introduced and gradually integrated into the First Pillar.

Strengthening Liquidity Management

(E) To strengthen liquidity management and reduce liquidity risk in the banking system, the framework introduces liquidity regulatory indicators, including liquidity coverage and the net stable asset ratio. The Basel Committee also proposed ancillary monitoring tools, including contract mismatch duration, financing concentration, availability of non-realized barrier assets, and market-related monitoring tools.