Basel III

Required capital ratios

The Federal Reserve Board issued its interim final Basel III capital rule on Sept. 24, 2013. The rule establishes an integrated regulatory capital framework that addresses shortcomings in capital requirements, particularly for larger, internationally active banking organizations. The rule implements in the U.S. the Basel III regulatory capital reforms from the Basel Committee on Banking Supervision and certain changes required by the Dodd-Frank Act.

Under the final rule, minimum requirements increase for both the quantity and quality of capital held by banking organizations. Consistent with the international Basel framework, the rule includes a new minimum ratio of common equity Tier 1 capital to risk-weighted assets of 4.5 percent and a common equity tier 1 capital conservation buffer of 2.5 percent of risk-weighted assets that will apply to all supervised financial institutions. The rule also:

  • Raises the minimum ratio of Tier 1 capital to risk-weighted assets from 4 percent to 6 percent and includes a minimum leverage ratio of 4 percent for all banking organizations.
  • For the largest, most internationally active banking organizations, it includes a new minimum supplementary leverage ratio that takes into account off-balance sheet exposures.

On the quality of capital side, the final rule:

  • Emphasizes common equity Tier 1 capital and implements strict eligibility criteria for regulatory capital instruments.
  • Improves the methodology for calculating risk-weighted assets to enhance risk sensitivity.

Read final rule