Basel III Capital Framework: CET1, Tier 1 and 2, CCB, Leverage Ratio, LCR and NSFR

Basel III is the single most examinable capital-adequacy topic in the CAIIB Risk Management paper, and getting its ratios right is easy marks. Basel III is the comprehensive set of international banking reforms developed by the Basel Committee on Banking Supervision after the 2008 global financial crisis, designed to strengthen bank capital, improve loss-absorbing capacity, introduce leverage and liquidity standards, and reduce systemic risk. In India these norms are implemented by the Reserve Bank of India, often with a slightly more conservative overlay than the global minima. For a deeper explainer see our guide to basel iii norms.

🏛️ The Three Pillars of Basel III

Basel III rests on three pillars ✅:

• Pillar 1 — Minimum Capital Requirements: credit, market and operational risk capital. 📌
• Pillar 2 — Supervisory Review Process (SREP/ICAAP): banks assess and hold capital for all material risks.
• Pillar 3 — Market Discipline: disclosure requirements so markets can assess risk. 💡

📐 Capital Tiers & Minimum Ratios (India)

This table is the most tested content in the paper. ⚠️ Note that India's total CRAR minimum (9%) exceeds the global Basel III minimum of 8%.

💡 Global Basel III minima are CET1 4.5%, Tier 1 6% and total 8%; India adds a cushion — CET1 5.5% and total CRAR 9%. On top sits the Capital Conservation Buffer of 2.5% in CET1, taking the effective CET1 requirement to 8% and total to 11.5%. To lock these numbers into memory, attempt the caiib mock test free and revise from concise caiib pdf notes.

⚖️ Leverage Ratio & CCyB

The leverage ratio is a non-risk-based backstop = Tier 1 Capital ÷ Total Exposure. ✅ RBI prescribes a minimum leverage ratio of 4% for domestic systemically important banks (D-SIBs) and 3.5% for other banks. 📌 The Countercyclical Capital Buffer (CCyB) — up to 2.5% — can be activated by RBI in periods of excessive credit growth (currently at 0% in India as of 2026, but examinable in concept). ⚠️

💧 Liquidity Standards — LCR & NSFR

Basel III introduced two liquidity ratios to complement capital rules.

💡 The LCR ensures short-term resilience (30 days) using High Quality Liquid Assets, while the NSFR promotes stable funding over a one-year horizon. Together they address the liquidity gaps exposed in 2008. Build full mastery with the CAIIB course, apply the ratios on tests, read more on the blog, track policy rates on RBI rates, and revise via the match game.

🧱 Composition of Capital — What Counts Where

Examiners love to test which instrument belongs in which tier. 📌 Get the composition right:

• CET1 ✅ — paid-up equity capital, statutory reserves, share premium, disclosed free reserves and balance in the profit & loss account. It is the highest-quality, permanently loss-absorbing capital.
• Additional Tier 1 (AT1) — perpetual non-cumulative preference shares and perpetual debt instruments (PDIs) with loss-absorbency features. ⚠️
• Tier 2 — revaluation reserves (at a discount), general provisions/loan-loss reserves, subordinated debt with a minimum original maturity, and hybrid instruments. 💡

Remember: Risk-Weighted Assets (RWA) are the denominator of every capital ratio — assets are weighted by their credit risk (e.g., 0% for cash/sovereign, 20% for certain banks, up to 100%+ for risky corporates), so higher-risk lending demands more capital.

🌍 Evolution & Indian Implementation

Understanding the journey from Basel I to Basel III adds context that helps in descriptive answers.

💡 In India, RBI phased in Basel III from 1 April 2013, with buffers and ratios implemented progressively. The Indian norms are deliberately more conservative — a higher CET1 and CRAR — reflecting RBI's cautious supervisory stance, which is exactly the kind of India-specific detail the CAIIB paper rewards.

🧮 A Quick CRAR Calculation & Common Traps

Risk Management questions frequently ask you to compute CRAR or identify whether a bank meets the minimum. 📌 The formula is simple: CRAR = (Tier 1 + Tier 2 Capital) ÷ Risk-Weighted Assets × 100. For example, a bank with ₹90 crore Tier 1, ₹30 crore Tier 2 and ₹1,000 crore RWA has a CRAR of 12% — comfortably above the 9% minimum, and above the 11.5% CRAR-plus-CCB level. ✅ Watch these traps:

• Tier 2 cap ⚠️ — Tier 2 capital admitted cannot exceed Tier 1 capital; excess is disregarded.
• Buffer confusion — the 2.5% CCB sits on top of the 9% minimum, not inside it. 📌
• Leverage vs CRAR — leverage uses total exposure (unweighted), CRAR uses RWA. 💡
• D-SIB surcharge — systemically important banks carry an additional CET1 surcharge on top of standard requirements.

Knowing the formula and these caveats turns numerical Basel questions into guaranteed marks, and reinforces why capital adequacy is the cornerstone of prudential regulation worldwide. It is equally worth remembering that Basel III also tightened the definition of capital itself — stripping out lower-quality instruments that were counted under Basel II — and introduced strict deductions from CET1 (such as goodwill, deferred tax assets and investments in the capital of other financial entities). These deductions can meaningfully reduce a bank's usable capital, so questions that give you gross figures and ask for the net CET1 are a favourite way for examiners to test whether you truly understand the framework rather than merely memorising ratios.

• Key takeaways 🎯
• Global Basel III: CET1 4.5%, Tier 1 6%, total 8%; India: CET1 5.5%, CRAR 9%.
• Capital Conservation Buffer = 2.5% CET1, on top of minimums.
• Leverage ratio = Tier 1 ÷ Total Exposure (4% D-SIB / 3.5% others).
• LCR ≥ 100% (30-day stress); NSFR ≥ 100% (1-year stable funding).
• Three pillars: minimum capital, supervisory review, market discipline.

🎯 Conclusion

Basel III — its capital tiers, buffers, leverage and liquidity ratios — is guaranteed to appear in the Risk Management paper, and now you have every number. We have covered the three pillars, the CET1/Tier 1/Tier 2 minimums for both global and Indian norms, the 2.5% capital conservation buffer, the countercyclical buffer, the leverage ratio for D-SIBs and other banks, the LCR and NSFR liquidity standards, the composition of each capital tier, the evolution from Basel I to Basel III, and a worked CRAR calculation with its common traps. Together these give you complete command of the topic. Practise application on our tests and deepen your grasp with the structured CAIIB course. Memorise the ratio table, rehearse the CRAR formula, and score with confidence.