Basel III - 3 Pillars

The Basel  III  Guidelines are based upon 3 very important aspects which are referred as 3 pillars of the Basel III .

• Minimum Capital  Requirement
• Supervisory review Process
• Market Discipline

First Pillar:  Minim um  Capital Requirement

Minimum capital requirements based on market, credit and operational risk to (a) reduce risk of failure by cushioning against losses and (b) provide continuing access to financial markets to meet liquidity needs, and (c) provide incentives for prudent risk management

Minimum capital requirement is 10.5% under Basel III which has been increased from 8% under Basel - II

Second Pillar:  Supervisory  Review Process

The second pillar i.e. Supervisory Review Process is basically intended to ensure that the banks have adequate capital  to support all the risks associated in their businesses. In India , the RBI  has issued the guidelines to the banks that they should have an internal supervisory process which is called ICAAP or Internal Capital Adequacy Assessment Process. With this tool  the banks can assess the capital adequacy in relation to their risk profiles as well as adopt strategies for maintaining the capital levels. 

Apart from that, there is another process stipulated by RBI which is actually the Independent assessment of the ICAAP of the Banks. This is called SREP or Supervisory  Review and Evaluation Process.The independent review and evaluation may suggest prudent measures and supervisory actions whatever is needed.

Third Pillar:  Market Discipline

The idea of the third pillar is to complement the first and second pillar. This is basically a discipline followed by the bank such as disclosing its capital  structure, tier-I  and Tier –II  Capital  and approaches to assess the capital  adequacy.