Basel II broadened risk coverage compared to Basel I. It now includes credit risk, market risk, and operational risk, unlike Basel I which focused solely on credit risk.

The failure of Bankhaus Herstatt, a small German bank, caused significant losses for international financial institutions and disrupted markets for months. This event revealed the lack of coordination between national supervisors, leading to the creation of the Basel Committee to improve financial stability and global banking supervision.

Basel III requires a minimum CET1 (Common Equity Tier 1) ratio of 4.5% relative to risk-weighted assets. This ratio aims to strengthen the quality of bank capital to improve their resilience against financial shocks.

The two guiding principles are: no banking system should escape supervision, and bank supervision must be adequate and consistent across member jurisdictions. These principles aim to prevent unsupervised risks that could threaten global stability.

The LCR is a liquidity ratio introduced by Basel III to ensure that banks can survive a 30-day liquidity stress without external support. It requires that high-quality liquid assets be at least equal to net cash outflows over this period.

Basel Committee ratios are classified according to their objective. The LCR and NSFR are liquidity ratios. CET1 is a capital ratio. The LCR ensures that banks can survive a 30-day liquidity stress. The NSFR reduces dependence on short-term wholesale funding. CET1 measures capital quality.

Basel II, adopted in 2004, introduced a three-pillar architecture: Pillar 1 establishes minimum capital requirements, Pillar 2 introduces a supervisory review process, and Pillar 3 imposes market discipline through transparency and disclosure.