# Basel Iii > Basel III/IV Framework - Skill: `brainbytes-dev/basel-iii` (Agent Skill) - Install (CLI): `npx skillmds@latest add brainbytes-dev/basel-iii` - Raw SKILL.md: https://api.skillmd.com/api/skills/brainbytes-dev/basel-iii/raw - Safety review: pending - Works with: Claude Code, Claude.ai, OpenAI Codex - Category: Coding & Dev Tools - Author: brainbytes-dev (https://skillmd.com/u/brainbytes-dev) - Updated: 2026-09-17 - Page: https://skillmd.com/skills/brainbytes-dev/basel-iii --- # Basel III/IV Framework > Capital requirements, liquidity ratios, leverage — comprehensive Basel regulatory framework for banking supervision. ## When to Activate - Capital adequacy calculations (CET1, Tier 1, Total Capital) - Risk-weighted asset computation (credit, market, operational risk) - Liquidity ratio analysis (LCR, NSFR) - Leverage ratio assessment - Capital buffer requirements - FRTB (Fundamental Review of the Trading Book) implementation - Basel IV output floor impact analysis - Regulatory capital planning and stress testing ## Core Concepts ### Capital Structure **Common Equity Tier 1 (CET1)** — highest quality: - Common shares, retained earnings, accumulated OCI (with adjustments) - Deductions: goodwill, intangible assets, deferred tax assets (threshold), investments in financial institutions - Minimum requirement: 4.5% of RWA **Additional Tier 1 (AT1)**: - Perpetual instruments with loss-absorption features (CoCos — contingent convertibles) - Write-down or conversion trigger at CET1 ratio of 5.125% (or higher) - AT1 + CET1 minimum: 6.0% of RWA **Tier 2 Capital**: - Subordinated debt (minimum 5-year original maturity, amortized in last 5 years) - Eligible provisions (up to limit) - Total Capital minimum: 8.0% of RWA ### Capital Requirements Summary ``` Minimum + Conservation + Countercyclical + G-SIB CET1 4.5% 7.0% 7.0-9.5% 8.0-10.5% Tier 1 6.0% 8.5% 8.5-11.0% 9.5-12.0% Total Capital 8.0% 10.5% 10.5-13.0% 11.5-14.0% ``` ### Capital Buffers | Buffer | Size | Trigger | Effect when breached | |--------|------|---------|---------------------| | Conservation buffer | 2.5% CET1 | Always on | Restrictions on dividends, buybacks, bonuses | | Countercyclical buffer | 0-2.5% CET1 | Set by national authority based on credit cycle | Restrictions on distributions | | G-SIB surcharge | 1.0-3.5% CET1 | Systemically important banks (buckets 1-5) | Restrictions on distributions | | D-SIB surcharge | Varies | National authority designation | Restrictions on distributions | ### Risk-Weighted Assets (RWA) **Credit Risk — Standardized Approach:** - Sovereign: 0% (AAA-AA), 20% (A), 50% (BBB), 100% (BB-B), 150% (below B), 100% (unrated) - Banks: Based on External Credit Assessment or SCRA (Standardized Credit Risk Assessment) - Corporate: 20-150% based on rating; SME support factor available - Retail: 75% (regulatory retail), Residential mortgage: 20-70% (based on LTV) - Commercial real estate: 60-150% (based on LTV and income-producing) **Credit Risk — IRB Approaches:** - Foundation IRB (F-IRB): Bank estimates PD; LGD, EAD, M prescribed by supervisor - Advanced IRB (A-IRB): Bank estimates PD, LGD, EAD, M - Key parameters: PD (Probability of Default), LGD (Loss Given Default), EAD (Exposure at Default), M (Maturity) - RWA = K x 12.5 x EAD, where K is the capital requirement from the IRB formula **Market Risk — FRTB:** - Standardized Approach (SA): Sensitivities-based method (delta, vega, curvature) + Default Risk Charge + Residual Risk Add-on - Internal Models Approach (IMA): Expected Shortfall (replaces VaR), with liquidity horizons, P&L attribution test, backtesting - Boundary between banking book and trading book: stricter rules, reduced arbitrage **Operational Risk — Basel IV:** - New Standardized Approach replaces all previous approaches (BIA, TSA, AMA) - Business Indicator Component (BIC) = Business Indicator x marginal coefficient (alpha) - Internal Loss Multiplier (ILM) based on historical losses (optional, jurisdictional discretion) ### Liquidity Ratios **Liquidity Coverage Ratio (LCR):** ``` LCR = High Quality Liquid Assets (HQLA) / Total net cash outflows over 30 days >= 100% ``` - HQLA Level 1: Cash, central bank reserves, sovereign bonds (0% risk weight) — no haircut - HQLA Level 2A: 20% RW sovereign/PSE bonds, covered bonds (AA-) — 15% haircut, max 40% of HQLA - HQLA Level 2B: Corporate bonds (A+ to BBB-), RMBS (AA), equities — 25-50% haircut, max 15% of HQLA - Cash outflows: Retail deposits (3-10%), unsecured wholesale (5-100%), secured funding, derivative obligations - Cash inflows: Contractual inflows capped at 75% of outflows **Net Stable Funding Ratio (NSFR):** ``` NSFR = Available Stable Funding (ASF) / Required Stable Funding (RSF) >= 100% ``` - ASF: Weighted liabilities and equity (weight 0-100% based on stability) - RSF: Weighted assets and off-balance sheet exposures (weight 0-100% based on liquidity) - Ensures stable funding for assets over 1-year horizon ### Leverage Ratio ``` Leverage Ratio = Tier 1 Capital / Total Exposure Measure >= 3% ``` - Exposure measure: On-balance sheet items + derivative exposures (SA-CCR) + SFT exposures + off-balance sheet items - Non-risk-based backstop to risk-weighted capital requirements - G-SIB leverage ratio buffer: 50% of G-SIB surcharge ### Basel IV — Output Floor - IRB banks: RWA cannot be less than 72.5% of standardized approach RWA - Phase-in: 50% (2023) rising to 72.5% (2028) — timelines vary by jurisdiction - Significant impact for banks with low-risk portfolios (e.g., residential mortgages) ## Methodology ### Capital Adequacy Assessment 1. **Classify capital instruments**: CET1, AT1, Tier 2 — apply deductions and adjustments 2. **Calculate credit risk RWA**: Standardized or IRB approach for each exposure class 3. **Calculate market risk RWA**: SA or IMA under FRTB rules 4. **Calculate operational risk RWA**: New Standardized Approach (BIC x coefficient) 5. **Apply output floor**: Max(IRB RWA, 72.5% x SA RWA) 6. **Compute capital ratios**: CET1%, Tier 1%, Total Capital% 7. **Assess buffer requirements**: Conservation + countercyclical + systemic 8. **Identify shortfall or surplus**: Actual ratios vs. requirements including buffers ### LCR Calculation Steps 1. **Inventory HQLA**: Classify Level 1, 2A, 2B; apply haircuts and caps 2. **Calculate cash outflows**: Apply run-off factors to each liability/commitment category 3. **Calculate cash inflows**: Apply inflow rates to maturing assets (cap at 75% of outflows) 4. **Net cash outflows**: Outflows - min(inflows, 75% x outflows) 5. **LCR**: HQLA / net cash outflows ### Stress Testing Integration - Capital ratios under adverse scenarios (GDP decline, interest rate shock, credit losses) - Supervisory stress tests (EBA, Fed CCAR/DFAST) - Internal stress tests informing capital planning - Reverse stress testing: What scenarios would breach minimum requirements? ## Templates ### Capital Ratio Computation ``` Amount (EUR m) CET1 Capital Common shares __________ Retained earnings __________ AOCI adjustments __________ (-) Goodwill and intangibles __________ (-) Other regulatory deductions __________ = CET1 Capital __________ AT1 Capital __________ Tier 1 Capital (CET1 + AT1) __________ Tier 2 Capital __________ Total Capital __________ RWA — Credit Risk __________ RWA — Market Risk __________ RWA — Operational Risk __________ RWA — Output Floor Adjustment __________ Total RWA __________ CET1 Ratio: ____% (min 4.5% + buffers) Tier 1 Ratio: ____% (min 6.0% + buffers) Total Cap Ratio: ____% (min 8.0% + buffers) ``` ### LCR Summary ``` Amount Weight Weighted HQLA Level 1 _____ 100% _____ HQLA Level 2A _____ 85% _____ HQLA Level 2B _____ 50-75% _____ Total HQLA _____ Cash Outflows Retail deposits (stable) _____ 3-5% _____ Retail deposits (less stable) _____ 10% _____ Unsecured wholesale _____ 5-100% _____ Secured funding _____ varies _____ Total Outflows _____ Cash Inflows (capped at 75%) _____ Net Cash Outflows _____ LCR = HQLA / Net Outflows = ____% ``` ## Quality Gate - [ ] Capital instruments correctly classified (CET1/AT1/T2) with all deductions applied - [ ] Credit risk RWA uses correct approach (SA or IRB) per exposure class - [ ] Market risk captured under FRTB framework (SA or IMA) - [ ] Operational risk uses new standardized approach with correct BIC calculation - [ ] Output floor applied (72.5% of SA RWA, or phase-in percentage) - [ ] All applicable buffers identified (conservation, countercyclical, systemic) - [ ] LCR HQLA composition respects caps (Level 2A: 40%, Level 2B: 15%) - [ ] NSFR available and required stable funding weighted correctly - [ ] Leverage ratio includes all exposure categories (derivatives via SA-CCR) - [ ] Capital planning incorporates stress test results