Basel III Norms

Basel III emerged from the lessons of the 2008 global financial crisis, during which major global banks — despite appearing adequately capitalised under the preceding Basel II framework — collapsed or required government bailouts because their capital was of poor quality, their leverage was excessive, and they had insufficient liquidity buffers. The BCBS's response was a comprehensive package of reforms that strengthened the quality and quantity of capital banks were required to hold, introduced new liquidity standards, and added a leverage ratio as a non-risk-based backstop.

The three pillars of Basel III in the Indian context translate into specific requirements. The first and most discussed is Capital Adequacy — specifically the Capital to Risk-weighted Assets Ratio (CRAR). Banks in India are required to maintain a minimum CRAR of 11.5% under RBI's stricter domestic norms (versus the 10.5% Basel III minimum), comprising a minimum Common Equity Tier 1 (CET1) ratio of 8%, Additional Tier 1 (AT1) capital, and Tier 2 capital. CET1 consists predominantly of equity share capital and retained earnings — the highest quality capital that absorbs losses without triggering insolvency.

Liquidity standards under Basel III introduced two new ratios: the Liquidity Coverage Ratio (LCR) and the Net Stable Funding Ratio (NSFR). The LCR requires banks to hold sufficient high-quality liquid assets (HQLA — predominantly government securities) to survive 30 days of stress outflows without central bank support. The NSFR requires that long-term assets be funded with stable long-term liabilities. Indian banks, with their historically high SLR holdings, were generally well-positioned for LCR compliance, but the framework still necessitated changes in balance sheet composition and liquidity risk reporting.

For investors analysing Indian bank stocks, Basel III metrics — particularly CET1 ratios, AT1 bond issuances, and NSFR compliance — are important risk indicators. Banks that repeatedly raise equity capital to maintain CET1 ratios may dilute existing shareholders. AT1 bonds, which are perpetual instruments that can be written down if a bank's CET1 falls below a trigger, became newsworthy in India after the Yes Bank restructuring in 2020, where Rs 8,415 crore of AT1 bonds were written down to zero — a first in Indian banking history that triggered widespread debate about the risk disclosure standards for retail AT1 bond investors.