Basel III

Basel III (much like its older siblings Basel I and Basel II) was instituted to assist the banking industry's capacity for risk management, and for dealing with financial stress. The primary focus of III, as opposed to I or II, was to incentivize individual banks to be more diligent in financial risk management, in order to lessen the likelihood of system-wide catastrophes. It imposed stricter capital requirements than the previous two versions, and subdivided Tier 1 capital into two more categories: "Common Equity Tier 1" and "additional Tier 1 capital." It further increased the minimum Tier 1 capital requirements: Common Equity Tier 1 capital moved from 4% to 4.5%, with the minimum Tier 1 capital moving from 4% to 6%.
 
In addition, it required banks to have reserved additional capital during credit expansion, while loosening the capital requirements during periods of contraction. It made "systematically important" banks subject to larger capital requirements than smaller banks. Lastly, in order to discourage excessive borrowing or insufficient liquidity, Basel III established liquidity and leverage requirements. The leverage ratio (Tier 1 capital/total of on and off-balance assets - intangible assets) is now capped at 3%.