Basel and the capital rulebook in practice

The three numbers that matter

Basel III boils down, in practice, to three headline constraints a bank reports and must never breach.

1. The CET1 capital ratio

CET1 stands for Common Equity Tier 1. It is the highest-quality capital: mostly common shares and retained earnings, the money that absorbs losses first.

The ratio is:

Risk-Weighted Assets (RWA) is the key twist. You do not divide by total assets. You weight each asset by how risky it is. A government bond might carry a 0% risk weight (counts for nothing), a mortgage maybe 35%, an unsecured corporate loan 100% or more.

The Basel minimum for CET1 is 4.5% of RWA. But nobody runs at 4.5%. On top sit several buffers:

• Capital conservation buffer: +2.5%
• Countercyclical buffer: 0% to 2.5%, set by national regulators depending on the credit cycle
• G-SIB surcharge: an extra charge for a Global Systemically Important Bank (the biggest, most interconnected banks), typically +1% to +3.5%

Stack these and a large bank's effective CET1 requirement often lands around 9% to 13%, depending on the institution and jurisdiction (estimate, varies by bank and year).

A worked example

Say a mid-size bank has:

• CET1 capital: 12 billion USD
• RWA: 120 billion USD

Suppose this bank's required minimum plus buffers is 9.5%. It has a 0.5% cushion. That is 600 million USD of headroom (0.5% of 120 billion). If loan losses wipe out 700 million of capital, the ratio falls to roughly 9.4%, below the buffer, and restrictions kick in.

2. the liquidity coverage ratio (LCR)

Capital is about solvency. Liquidity is about surviving a bank run. The Liquidity Coverage Ratio (LCR) asks: if depositors and counterparties pulled funds for 30 days of stress, do you hold enough high-quality liquid assets (HQLA) to cover it?

The minimum is 100%. You must hold at least one dollar of liquid assets (cash, central bank reserves, top-rated government bonds) for every dollar you might have to pay out in a 30-day crisis.

This rule was written with 2008 in mind, when banks like Lehman Brothers had assets but no cash when the market froze. The 2023 failure of Silicon Valley Bank was, in part, a liquidity event: deposits fled faster than assets could be sold.

3. the leverage ratio

The CET1 ratio can be gamed by loading up on low-risk-weighted assets. The leverage ratio is the backstop that ignores risk weights entirely:

The Basel minimum is 3%. G-SIBs face a higher requirement (in the US, large banks are subject to an enhanced Supplementary Leverage Ratio). The point: no matter how "safe" your assets look on paper, you cannot borrow more than roughly 33 times your capital.

What happens if you breach

Here is the teeth of the framework. Breaching the buffer does not immediately shut the bank down. Instead it triggers the Maximum Distributable Amount (MDA).

The MDA is a cap on what the bank can pay out: dividends, share buybacks, and discretionary bonus payments to staff. The deeper you dip into the buffer, the tighter the cap.

Roughly (under EU CRD rules):

• Enter the top quarter of the buffer shortfall: you may distribute up to 60% of eligible profits
• Deeper: 40%, then 20%
• Bottom quarter: 0%. No dividend, no buyback, no bonus pool.

So the "specific number" your bank reports every quarter is not academic. Miss the buffer and the compensation committee's bonus plan and the board's dividend both freeze automatically. This is why bank CFOs manage CET1 to a target well above the minimum, holding what they call a "management buffer" on top of the regulatory one.

How the number actually gets reported

Large US banks file the FR Y-9C and related regulatory reports with the Federal Reserve. In the EU, banks submit COREP (Common Reporting) for capital and FINREP for financial data to their supervisor via the EBA's harmonized templates.

These are quarterly. Each filing states the CET1 ratio, LCR, and leverage ratio to the decimal. Supervisors compare them against thresholds and against the bank's own stress-test results.

Stress testing is the other half. In the US, the Fed runs the annual CCAR / DFAST (Comprehensive Capital Analysis and Review / Dodd-Frank Act Stress Test) exercise. It models a severe recession and asks: does your CET1 ratio stay above the minimum through the downturn? The result sets your Stress Capital Buffer, which feeds directly back into the CET1 requirement you must hold. So the stress test and the quarterly number are linked in a loop.

Practical constraints this imposes

The rulebook shapes daily banking decisions, not just quarterly filings.

Lending choices. Because RWA drives the denominator, a loan's risk weight affects how much capital it consumes. A bank short on CET1 may favor low-risk-weight lending (mortgages, government exposures) over higher-weight corporate or unsecured loans, tightening credit exactly where risk weights are high.

Business mix. Trading books, securitizations, and complex derivatives attract heavy capital charges under the finalized Basel rules. Several banks have trimmed these activities partly to save capital.

The "endgame" fight. In the US, the proposed Basel III endgame rules would raise RWA for large banks. As of early 2026, the exact calibration has been contested and revised after heavy bank lobbying, with regulators signaling a lighter version than the 2023 draft. Treat any specific percentage increase you hear as an estimate until the final rule is confirmed.

Divergence across regions. The EU and UK have set their own timelines and carve-outs (for example, treatment of certain mortgage and SME exposures differs). A global bank must satisfy the strictest applicable regulator in each jurisdiction, not a single global standard.

Key Takeaways

• The CET1 ratio (CET1 capital / risk-weighted assets) is the single most important number a bank reports quarterly. The Basel minimum is 4.5%, but buffers push effective requirements to roughly 9% to 13% for large banks (estimate, varies).
• Breaching the buffer triggers the Maximum Distributable Amount, an automatic cap on dividends, buybacks, and bonuses, which is why banks hold a management buffer well above the minimum.
• The LCR (minimum 100%) protects against 30-day liquidity runs; the leverage ratio (minimum 3%, higher for G-SIBs) is the unweighted backstop that RWA cannot game.
• Real reporting runs through the FR Y-9C in the US and COREP / FINREP in the EU, enforced by the Fed, OCC, FDIC, ECB, EBA, and PRA, with stress tests like CCAR / DFAST feeding back into required capital.
• Basel is not one global law: each jurisdiction implements it (CRR/CRD in the EU, agency rules in the US), and the US "endgame" calibration remained under negotiation into 2026.