Page 46 - Azerbaijan State University of Economics

Nigar Huseynlı: Basel Standards And Theır Applıcatıon

In Basel III, the capital ratio remains at 8%. Basel III introduced a minimum leverage

ratio. Banks are expected to have leverage ratios of at least 3% for this condition.

Liquidity requirements - Basel III introduced two required liquidity ratios (Türküner,
2016):
• Liquidity Coverage Ratio (LCR) ensures sufficient amount of assets to survive for
one month;
• The Net Stable Funding Ratio (NSFR) promotes long-term resilience by creating a
greater incentive for financial institutions to fund their operations with more stable
funding sources on an ongoing structural basis (Giordana & Schumacher, 2017);
• Changes in Counterparty Credit Risk (CCR)-Basel III introduced capital
requirements to cover Credit Value Adjustment (CVA) risk and higher capital
requirements for securitization products (Fratianni & Pattison, 2015).

Basel III consists of changes in the principles related to Basel II. The goal is to
minimize the losses of the banks, to reduce the probability of the banks failing. In
addition to the expansion of capital requirements, another addition is the creation of
leverage ratio and liquidity ratio in Basel III (Gürel, 2012).

The recent financial crisis has revealed how important the consequences of banks'
difficulties in financing themselves and their collapse are in the market. Therefore, this
arrangement was developed to reduce liquidity and payment problems. While the
liquidity coverage ratio (LCR) tracks the short term, the net stable funding ratio (NSFR)
addresses longer-term issues. Under the LCR, banks are required to hold sufficient
liquidity to cover short-term disruptions. The NSFR was developed to address long-term
structural problems arising from liquidity mismatches (Türküner, 2016).

The Basel III consensus was deemed necessary because of the shortcomings and
inadequacies of the previous version. From this point of view, we can characterize the
deficiencies of Basel II as the reasons that reveal the Basel III consensus. We can list
some of the reasons that led to the Basel III consensus as follows: (BDDK, 2010).

Strengthening the capital buffers that can fall abruptly in adverse market conditions,
Increasing the quality of bank capitals,
The introduction of a leverage ratio to support Basel II,
Reducing the cyclicity in the minimum capital requirement and making provisions,
To offer capital and liquidity regulation proposals to strengthen the banking sector,

In addition to improving risk management, increasing the resilience of banks against
stress environments.

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