Basel III is the third in a series of banking regulations put forth by the Basel Committee on Banking Supervision, which seeks to ensure that banks have sufficient capital on hand to weather financial crises. The regulation requires banks to maintain a Tier 1 capital ratio of at least 6%, and a total capital ratio of at least 8%.
Banks must hold common equity equal to at least 4.5% of their risk-weighted assets, and they must maintain a leverage ratio (the ratio of their total assets to their Tier 1 capital) of no more than 33%. In addition, banks are required to set aside funds to cover expected losses on loans, known as the “loss coverage ratio.””
The goal of Basel III is to make banks more resilient to financial shocks, and to protect taxpayers from having to bail out failing banks. The regulation is phased in over a period of several years, with full implementation scheduled for 2019.