A risk officer at a global bank has one job during examination week. Translate every number on the balance sheet into a Basel III ratio, prove the ratio clears the minimum, and document the calculation chain. Basel I was eight pages long and applied a flat 8% capital ratio. Basel III is over a thousand pages and stacks four ratios, three buffers, and a dozen calculation choices. The exam tests whether you understand what each rule was solving and how the rules fit together.
By the mid-1980s two problems converged. International banks competed across borders under different national capital regimes: a Japanese bank could operate at 3% capital while a U.S. bank carried 6%, and the U.S. bank lost business. Separately, the LDC debt crisis of the early 1980s exposed how thin equity buffers had become at the largest U.S. banks.
The Basel Committee on Banking Supervision drafted the 1988 Accord to set a common minimum capital ratio high enough to absorb meaningful losses. The Accord was eight pages.
Common mistakes
- Confusing Tier 1 with CET1. CET1 is the highest-quality capital: common equity and retained earnings only. Additional Tier 1 includes qualifying preferred and CoCos. Total Tier 1 is CET1 + AT1. The minimum CET1 ratio is 4.5%; the minimum Tier 1 ratio is 6.0%.
- Treating the capital conservation buffer as a hard minimum. Banks can operate below the buffer but face dividend, bonus, and buyback restrictions that escalate as the buffer depletes. The buffer is a soft constraint with hard consequences.
- Applying the standardized BI buckets cumulatively. Each bucket coefficient applies only to the marginal amount in that bucket, not retroactively to lower amounts. A BI of €18B uses 12% on the first €1B, 15% on the next €17B, not 15% on the full €18B.
Bottom line
- Basel I (1988): introduced the 8% minimum capital ratio against risk-weighted assets, solving competitive imbalance and undercapitalization. Crude risk weights drove regulatory arbitrage.
- Basel II (1999-2007): three pillars (minimum capital, supervisory review, market discipline); Standardized vs IRB credit and BIA/SA/AMA operational risk. Market risk amendments came earlier (1995, 1996).
- Basel 2.5 (2009): stressed VaR, incremental risk charge, and comprehensive risk measure patched the trading book, roughly doubling trading-book capital at most large dealers after 2007-09 losses.
- Basel III minimums: CET1 4.5%, Tier 1 6%, Total 8%, capital conservation buffer 2.5%, countercyclical 0-2.5%, G-SIB surcharge 1-3.5%.
Exam shortcut
When a question asks about Basel III ratios, the answer is usually one of CET1 4.5%, Tier 1 6%, Total 8%, or one of the buffers. Memorize the table and recognize the question framing. Distractors swap the numbers: Total 6% / Tier 1 8% is the classic flip. When a question describes operational risk under the SMA, walk the buckets carefully.
The full lesson (about 3,669 words, 24 min read) adds 2 worked examples, all 7 common mistakes, a self-check, free in the app.
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