Basel III is an international regulatory accord that introduced a set of reforms designed to mitigate risk within the international banking sector by requiring banks to maintain certain leverage ratios and keep certain levels of reserve capital on hand. Begun in 2009, it is still being implemented as of 2022. Basel III was drawn up in response to the global financial crisis of 2007-2008, which revealed serious deficiencies in the regulation and supervision of banks and other financial institutions. The goal of Basel III is to prevent another such crisis by making the banking system more resilient and less prone to failure.The most important element of Basel III is its requirement that banks maintain a minimum level of equity relative to their total assets (the so-called “leverage ratio”). This limits how much debt a bank can take on, making it less likely that it will become insolvent if its investments go bad. In addition, all member countries are required to put into place regulations governing how much reserve capital banks must hold against different types of risks (e.g., credit risk, market risk, operational risk). This makes the banking system more able withstand shocks from unexpected losses.
