Basel III Framework

Basel III is an internationally agreed-upon regulatory framework developed by the Basel Committee on Banking Supervision (BCBS) to strengthen the resilience of banks and the financial system. It builds upon previous Basel accords by introducing stricter capital requirements, enhanced risk management practices, and liquidity standards to mitigate systemic risks and financial crises.

Basel III in the BRMS Application

The Bank Risk Management Simulation (BRMS) software incorporates the Basel III framework to allow users to simulate regulatory compliance, risk assessment, and capital adequacy scenarios.

To facilitate learning and teaching, BRMS makes some simplifying assumptions while maintaining alignment with the core principles of Basel III. These simplifications ensure that users can focus on understanding regulatory requirements, risk dynamics, and capital management without unnecessary complexity.

This documentation will explain the key components of Basel III, describe how they are implemented within BRMS, and highlight the assumptions made to enhance clarity and usability.

Key Components of Basel III

The Basel III framework consists of several key components that ensure banks maintain adequate capital and liquidity buffers to withstand economic stress. These include:

• Risk-Based Capital Requirements: Ensuring banks hold sufficient capital relative to their risk exposure, primarily through Risk-Weighted Assets (RWA).
• Definition of Capital: Refining the quality and composition of regulatory capital, emphasizing Common Equity Tier 1 (CET1).
• Risk-Weighted Assets (RWA): Standardizing how banks measure risk across credit, market, and operational exposures.
• Leverage Ratio: Setting a minimum leverage ratio to limit excessive borrowing and ensure balance sheet stability.
• Liquidity Standards: Introducing the Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) to enhance short-term and long-term liquidity resilience.