Basel III Regulations - In Layman's terms
This article puts the Basel III regulations into simple & readable terms. It looks at what the regulations are, why they are needed, 4 key goals, 3 main components and more
The purpose of this post is to sort out the waffle and to explain the latest Basel III regulations in simple and readable terms aka Layman’s terms.
NB - Since writing this, the EU and UK have delayed implementation until 2027 as it still remains unclear what will happen with Basel III and the US.
What is/are the Basel III regulations?
Basel III is a set of rules that makes banks keep more currency in reserve. It aims to ensure that banks have enough cash on hand to stay safe during financial trouble.
It also aims to ensure that banks are stronger and so they don’t collapse and harm customers or the economy.
Basel III does NOT mean that banks have to have gold in reserve, just enough fiat currency!
Why was/is Basel III needed?
The 2008 Global Financial Crisis revealed that many banks:
Had such little capital that they were not able to cover losses
Relied too much on risky, short-term funding (which backfired)
Took too many risks with a multitude of financial products (CFD’s etc)
Lacked transparency i.e. were hiding their true financial health
4 Key Goals of Basel III
Strengthen Bank Capital
Requires banks to hold more ‘high-quality’ capital to cover losses. This does not necessarily mean gold and could mean increase fiat currency reserves.
Improve Liquidity
Ensure banks have enough cash or easily sellable assets to meet short-term and long-term needs.
Increase Transparency
Make banks financial health clearer to regulators, investors, and the public.
Reduce Risk
Limit risky activities and improve how banks measure and manage risks.
3 Main Components of Basel III
Basel III has 3 main components.
Capital Requirements
Banks must hold a certain amount of capital in order to absorb losses. Basel III makes these rules stricter than Basel II.
Liquidity Requirements
Banks must have enough liquid assets (define as cash or assets that can be quickly sold) to survive financial stress.
Leverage & Risk Management
Leverage and risk management looks to limit how much a bank can borrow compared to its capital, regardless of risk weights.
All of these 3 components could be considered as common sense. As Contrarian Capitalists will already know, the challenge with common sense is that it is NOT very common.
4 ways Basel III impacts banks & customers
There are 4 main impacts on banks.
Higher Costs
Banks will need more capital and more liquid assets. This can reduce profits which in turn means less currency available for lending or dividends
Safer Operations
Banks will need to become safer, protect their customers more and also try and protect the economy more
Stricter Reporting
Banks will need to become much stricter at reporting their financial health. This means more compliance and compliance costs.
Congruency and transparency are crucial, and the regulations are aimed at improving financial visibility throughout the banking sector.
Customers
The good news is that safer banks might lead to safer deposits for most customers. Stricter rules and regulations might make it harder for customers to get loans and banks might raise fees in order to cover costs for compliance.
Will Basel III help?
In my opinion, probably not. People that are reading this article are very likely interesting in physical gold, silver and like the idea of being out of the financial system.
The regulations are there in order to try to stop a repeat of the Global Financial Crisis in 2008. I do not believe that we should have such faith in the system and that history shows time and time again that similar things are likely to happen.
Given current debt challenges and so forth, I doubt that Basel III regulations will greatly help when the whole house of cards comes crashing down.
If you are yet to take a position in physical metals, then it would be a very good time to start protecting yourself and your family. NB - NOT FINANCIAL ADVICE
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I’m really fed up with over-regulation….
Nice summary!
I thot it was baseball regulations.