Key components of the Basel III framework include:
A stricter definition of capital.
Increased capital requirements for counterparty credit risk arising from derivatives.
Repurchase agreements (repos) and securities financing activities.
The introduction of higher capital ratios, a non-risk-based leverage ratio and a new global liquidity standard.
These new requirements, and the associated higher capital and liquidity costs, put further pressure on the profitability of banks.
Banks may review and adjust their business model and funding strategy to fulfill the new rules on the one hand, and go beyond compliance and restore profitability to protect shareholder value on the other. Basel III, therefore, can be much more than a regulatory matter; it can be a business issue with a regulatory trigger.
The capital squeeze resulting from Basel III is also making the optimization of risk-weighted assets (RWA) a key topic of discussion around the new framework. RWA optimization is not a new topic as many banks have conducted corresponding projects in the past and have implemented different measures.
With Basel III, however, RWA optimization can become more important, as an increase of the capital base which is vital for the survival and growth of banks is limited. Furthermore, with Basel III and the higher capital requirements for certain instruments, topics and methods, new concerns and levers can become the focus of attention.