Basel III Guidelines

Basel 3 guidelines seek to improve the ability of banks to withstand periods of financial and economic stress by prescribing more stringent capital and liquidity requirement. The main recommendation are:
- Raise minimum core capital stipulation
- Introduces counter cyclical measure
- Capital buffer, loss absorption capacity
- Bring Uniformity in liquidity standards globally ( bringing different countries at par)

Basel III will necessitate Indian banks to raise 6 lakh in 9 years. Raising more equity will dilute ROE for banks.
Basel III mandates 7% as tier1 capital requirement.
          - Minimum core capital requirement of 4.5%    ( compared to previously required 3.6%)
          - Buffer of 2.5% of risk weighted assets
So in total tier 1 capital requirement (7%) is much higher than previously required Tier 1 requirement of 3.6%.

Basel II - Right now total capital adequacy requirement (tier 1 + tier 2) of banks is 9% (RBI requirement) as against  8% (Basel II requirement)

Now RBI requirements are made same as Basel III. So Indian Banks will follow the same requirements as their foreign counterparts. But at the same time they need a lot of capital infusion to meet the capital requirements.

How do companies calculate capital requirements:
CAR ( Capital Adequacy Requirement) or CRAR ( Capital Risk Adjusted Ratio)
= Capital / Risk Weighted Assets

Here capital is equal to Tier 1 (Shareholder equity + capital reserves) + Tier II ( loan loss reserve)

3 Pillars :
Capital adequacy requirement, Supervisory process, Disclosure

Risk the 3 pillars target ( in the same order)
Credit risk, Operational risk, Market risk