In an interview with Knowledge@Wharton, Wharton finance professor Richard J. Herring discusses the reasoning behind the new capital-adequacy requirements in Basel III, some shortcomings and how the financial services industry will begin to cope with it.

For the curious minds, Basel III (also known as Basel 3) is a comprehensive set of reform measures, developed by the Basel Committee on Banking Supervision, to strengthen the regulation, supervision and risk management of the banking sector. The new rules prescribe how to assess risks, and how much capital to set aside for banks in keeping with their risk profile.

Basel III builds on the builds on the International Convergence of Capital Measurement and Capital Standards document (Basel II).