Basel III establishes tougher capital standards through more restrictive capital definitions, higher risk-weighted assets, additional capital buffers, and higher requirements for minimum capital ratios. The reforms will fundamentally impact profitability and require the transformation of the business models of many banks. These reforms will also require banks to undertake significant process and system changes in order to achieve upgrades in the areas of stress testing, counterparty risk, and capital management infrastructure.
In addition to new capital requirements, Basel III establishes liquidity standards through the introduction of liquidity coverage and net stable funding ratio targets. For many institutions, the liquidity challenge is likely to be greater than the capital challenge.
Despite the ample transition time to comply with new Basel III rules, banks should develop capital and liquidity strategies now. While the implementation timeframe for new requirements appears extended, in practice, we encourage banks that can do so to tackle the balance sheet consequences of the new regime sooner rather than later. Banks also need to be mindful of areas that require further clarity.