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Basel III explained simply
Basel III is the global rulebook for bank capital and liquidity, written by the Basel Committee on Banking Supervision after the 2007–2009 financial crisis and phased in from 2013. It answered one question: how do we make banks strong enough that the next crisis does not need a taxpayer bailout?
1. More and better capital
Before 2008, banks could meet capital rules with instruments that did not really absorb losses. Basel III focused on Common Equity Tier 1 — shares and retained earnings — and raised the amount required:
| Requirement | % of risk-weighted assets |
|---|---|
| CET1 minimum | 4,5% |
| Tier 1 minimum | 6% |
| Total capital minimum | 8% |
| Capital conservation buffer (CET1) | +2,5% |
| Countercyclical buffer (CET1, national) | +0–2,5% |
| G-SIB surcharge (CET1) | +1–3,5% |
See what the CET1 ratio is for how the ratio works.
2. The leverage ratio
A simple backstop: Tier 1 capital must be at least 3% of total exposure, with no risk weights. It stops banks piling up assets that models say are safe.
3. Two liquidity rules
- Liquidity Coverage Ratio (LCR): high-quality liquid assets must cover the net cash outflows of a 30-day stress scenario — at least 100%.
- Net Stable Funding Ratio (NSFR): over a one-year horizon, stable funding (equity, long-term debt, sticky deposits) must cover the assets that need it — at least 100%.
These rules exist because banks such as Northern Rock were solvent on paper but ran out of funding. See how bank runs happen.
4. Systemic banks pay more
The largest banks carry surcharges and must hold bail-in debt so they can fail safely — see what a G-SIB is.
5. The final reforms (“Basel 3.1” / “the endgame”)
A final package agreed in 2017 limits how far banks' own risk models can push capital down — an “output floor” of 72,5% of the standardised approach — and revises how credit, market and operational risk are measured. It is being implemented in stages from 2023 onwards, with timelines differing between the EU (via the CRR/CRD rules), the UK and the US.
Did it work?
Banks entered the 2020 pandemic shock with far more capital and liquidity than in 2008, and the system held. The 2023 failures of SVB and Credit Suisse showed the limits: rules only work if supervisors enforce them, and runs in the smartphone era move faster than any rulebook assumed.
Frequently asked questions
What is Basel III in simple terms?
A set of international rules that require banks to hold more and better-quality capital and enough liquid assets and stable funding to survive a crisis without a bailout.
What is the minimum CET1 ratio under Basel III?
4,5% of risk-weighted assets, plus a 2,5% capital conservation buffer — so 7% in practice — before any countercyclical, systemic or supervisory add-ons.
What is the difference between the LCR and the NSFR?
The LCR covers a 30-day stress (enough liquid assets to meet outflows), while the NSFR looks one year ahead (enough stable funding for the bank's assets).