The primary difference between Basel II and Basel III in terms of capital structure lies in both the quality and quantity of capital banks are required to hold. Under Basel II, banks had to maintain a total capital ratio of at least 8% of their risk-weighted assets, with a minimum Tier 1 capital of 4%, which included around 2% in Common Equity Tier 1 (CET1). However, the global financial crisis of 2008 exposed serious weaknesses in this framework, particularly the over-reliance on lower-quality capital instruments. In response, Basel III significantly strengthened the capital requirements by raising the CET1 minimum to 4.5%, increasing the Tier 1 capital requirement to 6%, and maintaining the total capital ratio at 8%. Additionally, Basel III introduced a capital conservation buffer of 2.5%, effectively raising the total capital requirement to 10.5%, along with a countercyclical buffer of up to 2.5%. Overall, Basel III places a greater emphasis on high-quality capital—particularly common equity—and introduces additional buffers to improve the resilience of banks during periods of economic stress.

Stay updated with C4S Courses.