The work of calculating and disclosing a bank's capital ratio and leverage ratio rests on the standards that the Basel Framework sets. The same standards underlie the calculation of the capital a bank holds against counterparty risk in derivatives, CVA, and market risk.

What the Basel Framework sets

The Basel Framework is the set of standards for judging, on the same international yardstick, whether a bank is run soundly. It includes the capital adequacy ratio and liquidity ratios. The Basel Committee on Banking Supervision (BCBS) develops the standards, and the FSA has put in place domestic rules based on them: notices, supervisory guidelines, and Q&As1. The BCBS's oversight body is the Group of Central Bank Governors and Heads of Supervision (GHOS), which approved the finalization of Basel III in 20172. Internationally agreed standards are minimum standards, and each country or region may adopt stricter rules2. The FSA's "Overview of the Basel framework" is written to be easy to understand. It asks readers to check the notices and supervisory guidelines when they need to comply with the rules3.

In Japan, Basel I in 1993 set how internationally active banks measure their capital ratios and the minimum level. Basel II in 2007 refined risk measurement methods to keep pace with the diversification of financial transactions. Basel III, applied from 2013, strengthened the quality and quantity of capital and added the leverage ratio and liquidity regulations4.

Since Basel II, capital ratio regulation has been positioned as three pillars that complement each other to keep banks sound5.

Pillar What it requires
Pillar 1 (minimum capital requirements) Sets minimum ratios and requires capital in line with the risks a bank holds. If a bank falls below them, the authorities order corrective measures
Pillar 2 (banks' own risk management and supervisory review) A bank assesses its main risks, including those outside Pillar 1, and considers the capital it needs to run its business. The authorities evaluate whether that effort is sufficient
Pillar 3 (market discipline) Banks disclose information so that market participants can compare how well each bank manages risk

Under Pillar 2, a bank assesses its main risks, including those outside Pillar 15. For example, interest rate risk in the banking book is not subject to a Pillar 1 capital charge and is handled under Pillars 2 and 36. Pillar 3 is the disclosure framework. Every quarter, banks disclose the composition of capital, an overview of risk-weighted assets, the leverage ratio, and the liquidity coverage ratio (items required of banks that apply the international standard, that is, banks with overseas business offices)7.

Minimum capital levels and buffers

The capital adequacy ratio is capital divided by risk-weighted assets (RWA). Under the international standard, which applies to banks with overseas business offices, the numerator is split into three measures, each with its own minimum89.

Ratio Numerator Minimum
Common equity Tier 1 (CET1) ratio CET1 capital, such as common stock and retained earnings 4.5%
Tier 1 ratio CET1 capital plus additional Tier 1 capital, such as preferred stock and perpetual subordinated bonds 6%
Total capital ratio Tier 1 capital plus Tier 2 capital, such as subordinated bonds with a fixed term 8%

How to find the RWA denominator, with a worked example of risk weights, is covered in Risk-Weighted Assets (RWA). Banks with no overseas business offices are subject to a separate domestic standard (covered in a later section). When a bank falls below the minimum, the authorities can order prompt corrective action, such as submitting a business improvement plan, depending on the category10.

Banks under the international standard must also hold capital buffers on top of the minimums. The capital conservation buffer is 2.5% and is meant to absorb future stress. The countercyclical buffer is set by each country when domestic credit is judged to be excessive, and Japan's level was 0% as of August 2026. Global systemically important banks (G-SIBs) face an additional capital charge of 1.0–3.5%, and each country sets the level for domestic systemically important banks (D-SIBs). When a buffer falls below its reference value, outflows such as dividends, bonuses, and share buybacks are restricted11.

The leverage ratio and liquidity regulations

The leverage ratio is a simple measure introduced to curb the buildup of leverage in the banking system. It does not multiply assets by risk weights. It is Tier 1 capital divided by the exposure measure, which combines assets such as loans with off-balance-sheet transactions such as guarantees, and it complements the risk-based capital ratio12. Consider a hypothetical example in which Tier 1 capital is 3 trillion yen and the exposure measure is 100 trillion yen. The leverage ratio is 3%. Even a bank whose capital ratio looks high because it holds mostly low-risk-weight assets will show a low leverage ratio if its exposure measure is large.

There are two liquidity regulations. The liquidity coverage ratio (LCR) requires banks to hold high-quality liquid assets, such as cash and government bonds, so that they can meet cash outflows under 30 days of stress. Consider a hypothetical example in which liquid assets are 12 trillion yen and net cash outflows are 10 trillion yen. The LCR is 120%, which meets the requirement. If net cash outflows over the stress period rise to 13 trillion yen, the LCR falls to about 92%, below 100%.

The net stable funding ratio (NSFR) requires banks that hold assets with long remaining maturities or low market liquidity to back them with stable funding13.

Regulation Form of the ratio Minimum Introduction in Japan (banks under the international standard) Domestic-standard banks
Leverage ratio Tier 1 capital ÷ exposure measure 3% (3.15% in Japan since April 2024; see the text below) Disclosure (Pillar 3) in 2015, minimum requirement (Pillar 1) in 2019 Data submitted to the authorities
LCR High-quality liquid assets ÷ net cash outflows over 30 days of stress 100% In stages from 2015 Data submitted to the authorities
NSFR Available stable funding ÷ required stable funding 100% From the period ending September 2021 Not applied

Since April 2024, the leverage ratio has excluded deposits with the Bank of Japan from the exposure measure, in exchange for a higher minimum of 3.15%12.

Basel III after the financial crisis

Basel III was developed as a package of regulatory reforms after the financial crisis2. In the crisis, there were cases in which mark-to-market losses on derivatives caused by a deterioration in counterparties' creditworthiness exceeded the losses from actual counterparty defaults. Basel II had a framework for capital against counterparty default (capital for counterparty credit risk). It had no framework, however, for changes in the market value of derivatives caused by a deterioration in a counterparty's creditworthiness, that is, a capital charge for credit valuation adjustment (CVA). Basel III, published in 2010, added this CVA capital charge14. In December of the same year, the introduction of the leverage ratio regulation was also announced15.

The BCBS then finalized the capital treatment of bilateral counterparty credit risk in 2011 and published the final rule document for SA-CCR in 2014. In 2013, the BCBS and the International Organization of Securities Commissions (IOSCO) published their final report on margin requirements for uncleared derivatives16. The report calls for financial institutions and others that trade uncleared derivatives to exchange initial margin and variation margin according to the counterparty risk of their counterparties17.

The 2017 finalization and the timing of implementation in Japan

On December 7, 2017, the GHOS approved the last outstanding parts of Basel III, and Basel III was finalized. The finalization includes a revision of the CVA risk framework, the introduction of an aggregate output floor (a mechanism that sets a lower limit on risk-weighted assets calculated with banks' internal models), and revisions to the calculation methods for credit risk and operational risk2. The FSA also counts the "Minimum capital requirements for market risk" published in January 2019 as part of the Basel III finalization1. The aim is to reduce the variation in risk-weighted assets among banks and make capital ratios easier to compare2.

The international implementation date was originally January 2022, and it was postponed by one year to January 2023 because of the effects of the COVID-19 pandemic. In Japan, the application is as follows18.

Time What happens
From April 2022 Japan puts the related regulations in place
From March 31, 2023 Institutions that wish to do so may apply the rules earlier than the dates below by notifying the FSA
March 31, 2024 Institutions under the international standard, and domestic-standard institutions that use internal models (excluding final designated parent companies). Internal models are a method in which a bank measures risk with its own models
March 31, 2025 Domestic-standard institutions that do not use internal models, and final designated parent companies (a category under the Financial Instruments and Exchange Act)

The FSA's document also summarizes the implementation dates in other countries and regions as of December 2025. The EU is 2025 (with only market risk postponed to 2027), the UK is 2027 (with the use of internal models for market risk planned to be postponed to 2028), and the US date is undecided18.

International and domestic standards

In Japan, the international standard applies to banks with overseas business offices (overseas subsidiaries or branches), and the domestic standard applies to all other banks19. The two standards are set out in FSA notices issued under the Banking Act8. Bank holding companies, the Norinchukin Bank, Shoko Chukin Bank, shinkin banks, and others each have separate notices120.

A single point separates the two: whether the bank has overseas business offices (subsidiaries, branches). A bank that has them falls under the international standard, and a bank that does not falls under the domestic standard.

Consider a hypothetical example in which Bank C has overseas branches, and another in which it has none. The minimums for the three ratios are in the table in "Minimum capital levels and buffers", and the core capital ratio is in the table below.

  • If Bank C has overseas branches, it meets the condition of having overseas business offices, so it falls under the international standard. The minimums for all three ratios apply, as do the capital buffers and the NSFR.
  • If Bank C has no overseas business offices, it does not meet that condition, so it falls under the domestic standard. As a rule, the only minimum is the core capital ratio, and the capital buffers and the NSFR do not apply.

Which standard applies is decided not only by whether the bank has overseas business offices but also by the scope of application set out in the notices8.

The differences from the international standard are as follows. The treatment of the leverage ratio, the LCR, and the NSFR is as shown in the earlier table21.

Item International standard Domestic standard
Numerator of the capital ratio Three measures: CET1 capital, Tier 1 capital, and total capital Core capital (a category that includes common stock and retained earnings)
Minimum CET1 ratio 4.5%, Tier 1 ratio 6%, total capital ratio 8% Core capital ratio 4%
Capital buffers Apply Do not apply
Denominator of the capital ratio Risk-weighted assets The same approach as the international standard (some simplified methods may be used)

A guide to the issues that involve derivatives

Within the Basel Framework, the issues that involve derivatives are divided as follows2216.

Issue What it covers Where it is covered in detail
Counterparty credit risk Losses from a counterparty's default Overview of the Regulatory Treatment of Counterparty Risk (SA-CCR, internal model method, CVA risk)
CVA risk Changes in market value caused by changes in a counterparty's creditworthiness CVA risk capital
Market risk (FRTB) The risk that the prices of securities and other holdings move with the market. The calculations under the standardized approach and the internal models approach were revised FRTB
Margin for uncleared derivatives Exchange of margin on trades that are not centrally cleared BCBS-IOSCO Margin Requirements for Uncleared Derivatives

The FRTB is the framework for market risk capital. The BCBS published it in January 2016 and revised it in January 201923.

What this page does not cover

The exceptions for domestic-standard banks, and the finer differences in how risk-weighted assets are calculated, are not covered on this page.

Notes

  1. Financial Services Agency, "自己資本比率規制等（バーゼル規制）について" (On capital adequacy regulation (the Basel framework), our translation) (web page, as of October 2026), the opening section "バーゼル規制の概要" (Overview of the Basel framework), which includes the explanation of the Basel III finalization, and the list of notices (in Japanese). ↩ ↩2 ↩3

  2. Financial Services Agency, "プレス・リリース「中央銀行総裁・銀行監督当局長官はバーゼルⅢの最終化に合意」（仮訳）" (Press release "The Group of Central Bank Governors and Heads of Supervision agreed to the finalization of Basel III", provisional translation; our translation of the title) (December 7, 2017), page 1 (the GHOS's position, post-crisis regulatory reform, and the aim), pages 1–2 (the revisions included in the finalization), and page 2 (minimum standards) (in Japanese). ↩ ↩2 ↩3 ↩4 ↩5

  3. Financial Services Agency, "バーゼル規制の概要" (August 2026), page 1 (the note on the cover) (in Japanese). ↩

  4. Financial Services Agency, "バーゼル規制の概要" (Overview of the Basel framework, our translation) (August 2026), page 2, "我が国におけるバーゼル規制（自己資本比率規制等）の実施" (Implementation of the Basel framework (capital ratio regulation, etc.) in Japan) (in Japanese). ↩

  5. Financial Services Agency, "バーゼル規制の概要" (August 2026), page 18, "自己資本比率規制における「３本の柱」" (The "three pillars" in capital ratio regulation) (in Japanese). ↩ ↩2

  6. Financial Services Agency, "バーゼル規制の概要" (August 2026), page 19, "銀行勘定の金利リスク（IRRBB）" (Interest rate risk in the banking book (IRRBB)) (in Japanese). ↩

  7. Financial Services Agency, "バーゼル規制の概要" (August 2026), page 20, "開示の主な項目と頻度" (Main disclosure items and frequency). The quarterly items are the composition of capital, an overview of risk-weighted assets, the leverage ratio, and the liquidity coverage ratio. These are the items required of institutions under the international standard after the Basel III finalization (in Japanese). ↩ ↩2

  8. Financial Services Agency, "銀行法第十四条の二の規定に基づき、銀行がその保有する資産等に照らし自己資本の充実の状況が適当であるかどうかを判断するための基準" (Standards for determining whether a bank's capital adequacy is appropriate in light of the assets it holds, under Article 14-2 of the Banking Act, our translation; FSA Notice No. 19 of 2006, full text updated on August 24, 2026), Article 2 (pages 26–27 of the full text), Article 1, items 10-2 and 10-3 (page 10), and Article 25 (pages 94–95) (in Japanese). Below, this notice is called the Notice. ↩ ↩2 ↩3

  9. Financial Services Agency, "バーゼル規制の概要" (August 2026), page 3 (the minimum levels, and the categories of capital) (in Japanese). ↩

  10. Financial Services Agency, "バーゼル規制の概要" (August 2026), page 13, "最低所要自己資本比率を下回ったときの対応" (Response when a bank falls below the minimum capital ratio) (prompt corrective action under the order that sets the categories provided in Article 26, paragraph 2 of the Banking Act), and the note on page 3 (in Japanese). ↩

  11. Financial Services Agency, "バーゼル規制の概要" (August 2026), page 5, "資本バッファー" (Capital buffers). The additional capital charge for G-SIBs ranges from 1.0–3.5% (in Japanese). ↩

  12. Financial Services Agency, "バーゼル規制の概要" (August 2026), page 6, "レバレッジ比率" (Leverage ratio). The framework since April 2024 is in the "（参考）" (reference) box on the same page (in Japanese). ↩ ↩2

  13. Financial Services Agency, "バーゼル規制の概要" (August 2026), page 7, "流動性カバレッジ比率" (Liquidity coverage ratio) and page 8, "安定調達比率" (Net stable funding ratio). The introduction dates are "in stages from 2015" on page 7 and "from the period ending September 2021" on page 8 (in Japanese). ↩

  14. Financial Services Agency and Bank of Japan, "「信用評価調整（CVA）リスクの最低所要自己資本」の概要" (Overview of "Minimum capital requirements for CVA risk", our translation) (February 2018), "１．これまでの経緯" (1. Background) (page 3 of the document) (in Japanese). ↩

  15. Financial Services Agency and Bank of Japan, "「レバレッジ比率の枠組みの見直し」の概要" (Overview of "Revisions to the leverage ratio framework", our translation) (February 2018), "１. スケジュール" (1. Schedule) (page 3 of the document), the row for December 2010 (in Japanese). ↩

  16. Financial Services Agency, "バーゼル銀行監督委員会" (Basel Committee on Banking Supervision, our translation) (web page), the list of published documents (the 2011 finalization of the capital treatment of bilateral counterparty credit risk, the 2013 final report on margin requirements by the BCBS and IOSCO, and the 2014 final rule document on SA-CCR) (in Japanese). ↩ ↩2

  17. Financial Services Agency, "中央清算されないデリバティブ取引に係る証拠金規制 ＜要旨＞（仮訳）" (Margin requirements for non-centrally cleared derivatives, summary, provisional translation; our translation of the title) (September 2013), page 6 (Key Principle 2: covered entities must exchange initial margin and variation margin according to the counterparty risk of their counterparties) (in Japanese). ↩

  18. Financial Services Agency, "バーゼル規制の概要" (August 2026), page 10, "バーゼルⅢ最終化の実施時期" (Implementation timing of the Basel III finalization). The dates for other countries are as of December 2025. The "バーゼル規制の概要" section of the FSA's "自己資本比率規制等（バーゼル規制）について" web page also describes the rules from April 2022 and the application on March 31, 2024 and March 31, 2025 (in Japanese). ↩ ↩2

  19. Financial Services Agency, "バーゼル規制の概要" (August 2026), page 16, "国際統一基準と国内基準" (International standard and domestic standard) (in Japanese). ↩

  20. Article 2-2, paragraph 1 of the Notice (pages 27–28 of the full text) refers to the notice that applies to bank holding companies (FSA Notice No. 20 of 2006) (in Japanese). ↩

  21. Financial Services Agency, "バーゼル規制の概要" (August 2026), page 17, "国際統一基準と国内基準の差異" (Differences between the international standard and the domestic standard) (core capital and the 4% minimum; capital buffers and the NSFR not applied; data on the leverage ratio and the LCR submitted to the authorities; simplified methods for the denominator) (in Japanese). ↩ ↩2

  22. Financial Services Agency, "バーゼル規制の概要" (August 2026), page 9, "バーゼルⅢ最終化の概要" (Overview of the Basel III finalization) (revisions to CVA risk and market risk), page 12 (market risk), and page 14, "リスク計測手法" (Risk measurement methods) (categories of measurement methods such as SA-CCR) (in Japanese). ↩

  23. Financial Services Agency, "バーゼル銀行監督委員会" (web page), the list of published documents: the final rule document "マーケット・リスクの最低所要自己資本" (Minimum capital requirements for market risk) (2016), and the January 2019 publication of "マーケット・リスクの最低所要自己資本" on the FSA's "自己資本比率規制等（バーゼル規制）について" page (in Japanese). ↩