Basel III: To what extent will it promote sustainable development?

The document examines the Basel III framework, which introduces higher capital standards, liquidity ratios, and leverage limits to prevent systemic risk. While intended to increase resilience, the author argues that Basel III may increase borrowing costs, reduce lending to small businesses in emerging economies, and encourage the growth of the unregulated 'shadow banking' sector. The paper also highlights that Basel III inherits flaws from Basel II, such as a failure to account for the specific macroeconomic needs of lower-income countries.

• Basel III introduces more stringent capital requirements, increasing Tier 1 capital from 4 per cent to 6 per cent and establishing a minimum common equity requirement of 4.5 per cent after regulatory adjustments.
• The framework implements a capital conservation buffer of 2.5 per cent and a countercyclical buffer (between 0 and 2.5 per cent) to protect banks from periods of excessive credit growth and systemic stress.
• New global liquidity standards include a liquidity coverage ratio to ensure banks can withstand a 30-day stressed funding scenario and a net stable funding ratio to address long-term structural liquidity mismatches.
• Basel III introduces a non-risk-based leverage ratio that limits total assets to 33 times equity capital to prevent the excessive leverage that contributed to the 2007–2008 financial crisis.
• There are concerns that Basel III will increase borrowing costs and reduce lending volumes in emerging and lower-income economies, particularly impacting small and medium-sized businesses that lack alternative financing.
• The framework may inadvertently drive the growth of the 'shadow banking' sector, as unregulated entities like hedge funds and insurance companies provide credit services without being subject to Basel III capital and liquidity rules.
• The author argues that Basel III fails to correct the shortcomings of Basel II, such as the use of internal risk models that allowed large banks to reduce capital requirements while smaller banks faced higher obligations.

APA

Perera, O. (2012). Basel III: To what extent will it promote sustainable development? International Institute for Sustainable Development. https://www.iisd.org/system/files/publications/basell3.pdf

Chicago

Perera, Oshani. Basel III: To what extent will it promote sustainable development? International Institute for Sustainable Development, 2012. https://www.iisd.org/system/files/publications/basell3.pdf.

Wikipedia

{{cite report |last1=Perera |first1=Oshani |title=Basel III: To what extent will it promote sustainable development? |publisher=International Institute for Sustainable Development |date=June 2012 |url=https://www.iisd.org/system/files/publications/basell3.pdf |access-date=23 October 2026 |via=Climate Insights Directory}}

BibTeX

@techreport{perera2012basel, author = {Perera, Oshani}, title = {{Basel III: To what extent will it promote sustainable development?}}, institution = {International Institute for Sustainable Development}, year = {2012}, month = jun, url = {https://www.iisd.org/system/files/publications/basell3.pdf}, urldate = {2026-10-23}, note = {Indexed by Climate Insights Directory} }