The global financial crisis arrived hot on the heels of Basel II being implemented, which highlighted the shortcomings of Basel II in preventing wider economic consequences resulting from banking failures. Basel III was implemented to address many of these shortcomings. We will cover the range of measures introduced in Basel III. However, at a high level, Basel III aimed to strengthen the amount and quality of capital that banks needed to hold, as well as introduced several additional requirements around leverage, liquidity, and funding. The first major change that was introduced in Basel III was an increase in the amount of regulatory capital that banks had to hold common equity. Tier 1 or CET1 is the bank's shareholder's equity minus goodwill. Other adjustments that might be required are to deduct deferred tax assets or investments in other financial institutions. Tier 1 capital is made up of CET1 and additional tier 1 or AT1 capital. The two main types of AT1 are preferred stock and contingent convertible or cocoa bonds, which are bonds that become equity automatically should the bank run into financial difficulties. Total capital includes tier 1 and tier 2 captial. Tier 2 capital is composed of items such as revaluation reserves, hybrid instruments, and subordinated debt. Basel III raised the minimum capital requirements for the CET1 ratio from 2 to 4.5% of risk weighted assets. The tier 1 capital requirement from 4 to 6% of risk weighted assets, in other words, meaning that AT1 is an additional 1.5% of risk weighted assets. The overall total capital requirement remained unchanged at 8%. The main change here, therefore, was to increase the amount of a bank's funding that must come from common equity. However, Basel III also added a number of other buffers on top of the total capital requirement to increase the amount of required equity funding even further. The first of these is the capital conservation buffer, which required additional CET1 of at least 2.5% of the bank's risk weighted assets. The aim of this buffer is to ensure that banks build up capital outside periods of stress. This buffer can then be used up during stressed times when losses are incurred. There isn't any regulatory penalty for drawing on this buffer during stressed times, but capital distributions such as dividends and employee bonuses may be restricted to help rebuild the buffer. The next buffer is the countercyclical capital buffer, or CCYB. This is designed to counter pro-cyclical in the financial system. Pro-cyclical refers to the situation where the actions of banks help to exacerbate the economic cycles through reducing lending during tougher economic times, which reduces the ability of businesses to take out loans to aid with an economic recovery or lending to willingly during good economic times to lenders that might not be able to repay increasing defaults and an economic downswing later to reduce this risk, the countercyclical buffer is set by national regulators at a level dependent on where that economy is at any given time. When the economy is performing well, the countercyclical buffer will increase to require banks to hold more capital, reducing the likelihood of excessive risk taking, and will decrease during economic downturns to encourage banks to take an appropriate level of risk. Under Basel III, the Countercyclical Buffer is set between 0 and 2.5% of a bank's risk weighted assets. It serves as an extension to the capital conservation buffer.