Basel III strengthens capital requirements and introduces liquidity coverage and leverage ratios, enhancing banking system stability. In developing countries, implementation challenges exist due to underdeveloped financial markets and limited data infrastructure. Nonetheless, over time, these reforms incentivize prudent risk-taking and improved governance in the banking sector.
Pritha Chaturvedi
Capital Requirements: Under Basel III, banks must maintain a minimum common equity tier 1 (CET1) capital ratio of 4.5%, up from 2% under Basel II, which helps absorb losses during financial stress. Liquidity Coverage Ratio (LCR): The LCR requires banks to hold sufficient liquid assets to cover potential cash outflows for 30 days, reducing the risk of liquidity crises. As of 2021, the average LCR for globally systemically important banks (G-SIBs) was approximately 147% Leverage Ratio: Basel III introduces a minimum leverage ratio of 3% to limit excessive borrowing, promoting stability. By 2022, major banks were reporting leverage ratios well above this minimum, indicating improved financial health Impact on Developing Countries: Many developing nations face challenges in implementing Basel III due to underdeveloped financial markets—only 19 out of 54 African countries had fully adopted Basel III standards by 2021 , Additionally, limited data infrastructure hinders effective compliance. Prudent Risk-Taking and Governance: Studies show that banks adhering to Basel III requirements demonstrate lower default rates and improved governance practices, resulting in stronger long-term performance and resilience during economic downturns
True: Basel III strengthens capital requirements and introduces liquidity coverage and leverage ratios, enhancing banking system stability.
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