What is Basel III and name two key components of its capital and liquidity requirements?

• A. Basel III is a tax policy.
• B. Basel III is an international regulatory framework for banks. Key components: higher minimum common equity tier 1 capital and liquidity requirements such as the liquidity coverage ratio and net stable funding ratio.
• C. Basel III applies only to insurance companies.
• D. Basel III reduces capital requirements.

Answer: (A)

Basel III is an international regulatory framework for banks that strengthens how banks hold capital and manage liquidity after the financial crisis. It raises the quality and amount of capital banks must keep and adds robust liquidity standards to ensure banks can survive periods of stress. Two key components are a higher minimum common equity tier 1 capital ratio, which increases loss-absorbing capacity, and liquidity requirements such as the liquidity coverage ratio and the net stable funding ratio, which ensure banks have enough high-quality liquid assets and stable funding to meet short- and longer-term needs. Basel III is not a tax policy, it does not apply only to insurance companies, and it generally tightens rather than reduces capital requirements.