Basel III, Risk-Weighted Capital Ratio
The Basel Committee on Banking Supervision (BCBS) established a set of reforms (Basel III) developed to “strengthen the regulation, supervision, and risk management of the banking sector”. Specifically, the Basel III reforms define a risk-weighted capital ratio that all regulated banks must adhere to. Simply put, the capital ratio of a given bank is their total asset value (liquid and illiquid) over the risk-weighted value of their illiquid asset portfolio. The idea behind the implementation of a capital ratio regulation is to ensure the stability of any given bank and their ability to meet their obligation to lenders. A breakdown of our teams specific development of the capital ratio for our algorithm can be seen in the Methods section of our final report.