Basel III Accord: Purpose and Banking Sector Reforms

Basel norms are global standards for banks. They ask banks to hold enough capital and cash against risk.

Who makes them?

• The Basel Committee on Banking Supervision (BCBS) writes the standards.
• Central bank governors of the Group of Ten countries set it up at the end of 1974.
• It sits at the Bank for International Settlements in Basel, Switzerland.
• The failure of Bankhaus Herstatt in West Germany was one trigger.

Do the norms have the force of law?

No. They are minimum standards. Each country must put them into its own rules. In India, the RBI issues the rules for banks.

What is the memory hook?

Think “Basel writes, RBI enforces”. The Committee sets the model. The RBI makes it binding.

Each version answered a weakness of the one before.

What are the steps?

• July 1988: the Basel Capital Accord asked for capital of at least 8% of risk-weighted assets.
• June 2004: the revised framework, called Basel II, added three pillars.
• The three pillars are minimum capital, supervisory review and market discipline.
• December 2010: after the crisis of 2007 to 2009, the Committee published Basel III.
• The global phase-in began in January 2013 and ended on 1 January 2019.

Why was Basel III needed?

The crisis showed that banks held too little loss-absorbing capital. They also ran short of cash in stress. Basel III raised capital quality and added liquidity ratios.

What is the memory hook?

Think “8, three pillars, then liquidity”. Basel I fixed 8%. Basel II added pillars. Basel III added liquidity.

The global rules set a floor. India sets higher numbers.

What is the global floor?

• Common equity (CET1): at least 4.5% of risk-weighted assets.
• Tier 1: at least 6%.
• Total capital: at least 8%.
• Conservation buffer: an extra 2.5%, held as common equity.
• Total with the buffer: 10.5%.
• A countercyclical buffer of 0% to 2.5% can be added in boom years. National regulators set it.

What does India ask?

India started Basel III on 1 April 2013. It moved in phases. These are the ratios:

• Common Equity Tier 1: at least 5.5% of risk-weighted assets.
• Tier 1: at least 7%.
• Total capital: at least 9%.
• Capital Conservation Buffer (CCB): an extra 2.5%, held as common equity.
• Total with the buffer: 11.5%.

How did the buffer phase in?

• The RBI said Basel III capital rules start on 1 April 2013 and finish on 31 March 2019.
• In January 2019 it moved the last 0.625% of the buffer to 31 March 2020.
• In March 2020 the RBI moved it again, with a new date of 30 September 2020.
• In February 2021 it was deferred from 1 April 2021 to 1 October 2021.

Why is the buffer there?

The buffer is a cushion for bad times. A bank that dips into it faces limits on payouts.

What is the memory hook?

Think “9 plus 2.5 makes 11.5”. The minimum is 9%. The buffer adds 2.5%.

Capital is not enough. A bank also needs cash when depositors rush out.

What does each ratio do?

• Liquidity Coverage Ratio (LCR): high-quality liquid assets must cover 30 days of stress outflows.
• Net Stable Funding Ratio (NSFR): funding must stay stable over a longer period against the bank’s assets and activities.

What are the dates?

• The BCBS issued the final LCR text on 7 January 2013.
• In India, the LCR began on 1 January 2015.
• It was fully in force on 1 January 2019.
• The BCBS issued the NSFR standard on 31 October 2014.

What is the memory hook?

Think “LCR is for a month, NSFR is for a year”. The LCR is short term. The NSFR looks further ahead.

Some banks are too big to fail. The RBI calls them Domestic Systemically Important Banks (D-SIBs).

Who is on the 2025 list?

• State Bank of India: Bucket 4, extra 0.80% of risk-weighted assets.
• HDFC Bank: Bucket 2, extra 0.40%.
• ICICI Bank: Bucket 1, extra 0.20%.
• The RBI released the list on 2 December 2025.
• The buckets are the same as in the 2024 list.

How does the extra capital work?

The extra capital is common equity. It comes on top of the Capital Conservation Buffer.

What is the framework date?

The RBI issued the D-SIB framework on 22 July 2014. It updated it on 28 December 2023.

The RBI issued new credit risk directions in 2026. They apply Basel III’s final reforms.

What are the key facts?

• The directions are the Commercial Banks (Capital Charge for Credit Risk, Standardised Approach) Directions, 2026.
• They take effect on 1 April 2027.
• They cover the banking book of commercial banks.
• Small Finance Banks, Payments Banks and Local Area Banks are outside them.
• They replace the existing standardised credit risk framework.

Is it in force yet?

Not yet. As of 9 October 2026, the date is a future one. Do not say the rules already apply.

Which banks does the older Basel III circular cover?

The RBI’s 2019 circular on transitional arrangements was addressed to scheduled commercial banks, excluding Regional Rural Banks and Local Area Banks.

Four mix-ups appear again and again. Learn each pair.

What are the traps?

• Law or standard? Basel norms are standards. The RBI makes them binding in India.
• Which year? Basel I is 1988. Basel II is 2004. Basel III followed the 2007 to 2009 crisis.
• Which ratio? The minimum total capital is 9%. With the buffer it is 11.5%.
• In force or not? The 2026 credit risk directions start on 1 April 2027.

What has UPSC asked?

UPSC has tested both Basel III and the capital adequacy ratio.

The key is option (a). The RBI, not each bank, sets the minimum ratio. View the 2018 paper.

The key is option (b). The other options are about biodiversity, emissions and ozone. View the 2015 paper.

Why check the date?

The RBI changes these numbers. Check its site before you quote a ratio.