By Praveen Gulabrani, Global Practice Head, Risk and Compliance Practice at Infosys
Debate around the implementation of Basel III has raged since the Basel Committee first announced its arrival in 2010. Trying to define and implement the regulation is proving to be a huge coordination effort, as regulators attempt to achieve consensus across various countries and market participants. Unsurprisingly, the legislation has been criticised for forcing additional regulation on an already compliance-heavy industry, especially at a time when global economies are under stress. For this reason, the Basel Committee has increased the allotted time that banks have to implement these guidelines. However, even with these delays, there is no question that the reforms are coming and banks must be ready. To make this process as painless as possible, banks will have to look to technology to help them. Whether it is in enabling the integration of new reporting systems or more accurately tracking and managing risk; technology will undoubtedly play a pivotal role in ensuring banks meet Basel III requirements, and in the long run, show the sceptics how the regulation can be beneficial.
Holding adoption back
Current challenges that banks are facing while implementing Basel III programmes can be grouped under the following areas:
The details still need ironing out – There is some ambiguity on the interpretation of the regulation since a lot of assumptions were made regarding the final rules. Even today, those final rules are somewhat ambiguous or under review with confusion existing around the requirements for trading book positions and counter party credit risk exposures (CCR) framework, adjustments of limit systems for new capital and liquidity ratios.
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New operational frameworks needed –Basel III requires banks to think about their operations in a whole new way. For example, the requirement for more regulatory capital lending that is designed to reduce Return on Equity (ROE), as well as higher capital requirements and buffers, are forcing banks to look for new sources of funding. Furthermore, the additional and more stringent regulatory requirements for risky business activities, such as derivatives, securitisation and trade finance guarantees, are forcing banks to reprioritise their business operations.
Lack of supporting technology – On the technology side, banks are struggling with a lack of credible, quality data needed to support these new requirements. In addition, even if they had the right information, they are unable to effectively integrate it with existing risk systems and reporting applications because of the different formats and inaccuracies within the information. The data is sometimes duplicate or incomplete, and it needs a significant data transformation effort to get a single view of the customer. Furthermore, Basel III has introduced requirements for evaluating risk across new areas,such asOver The Counter (OTC) derivatives, that were previously unregulated and therefore now require additional tools for storing, tracking, and reporting.
Geographical Interpretations -The ultimate aim of the regulation is to ensure global financial stability, but with many countries unwilling to agree on what exactly needs to take place, reaching a consensus is proving a challenge. For example, following the 2008 financial crash, U.S. banks were required to undergo stress tests and therefore, started on the Basel III journey slightly earlier than the rest of the world. Equally, on the other side of the world, Swiss regulators indicated they might go beyond new global banking rules by imposing stricter requirements on banks. Additionally, despite China’s banking sector playing a dominant role in funding economic development, it has been reticent to sign up to Basel III in case it hampers economic growth, driven by investment in new businesses and the provision of excess liquidity.
How banks can deal with these challenges
One area which most agree on is the fact that Basel III will force sizeable changes within the banking industry. Technology will be key to ensuring the smooth transition to this new way of working, but before banks rush into a new IT infrastructure, they must first conduct research, and discussion workgroups to validate their understanding of the regulation and ensure their compliance strategy aligns with both Basel III and business objectives.
To start with, banks will need to improve their existing models and processes to more accurately measure risk; specifically looking at the quality and completeness of their data. They should look at implementing data transformation initiatives to get a single view of the customer, consolidate sources of data, and create new data repositories for new regulatory areas, such as OTC derivatives. In turn, this will require Governance, Risk Management and Compliance (GRC) platforms to be integrated and streamlined to ease the burden that this will inevitably be putting on reporting. Banks will also need to review their data and meta-data repositories to accurately quantify the RWAs.
Additional, banks will need to revamp their reporting applications to include a ‘drill-down’ capability to provide additional information to regulators and internal business teams. Currently, many banks providestatic reports, but to better manage Basel III compliance, they now must consider analytical and drill down reporting technologies to provide run time information. This will enable them to become more transparent to regulators and more effectively manage their internal risks on a real time basis.
More than Compliance
The good news is that meeting these requirements is also an opportunity to consolidate existing IT infrastructure and invest in scalable technology architectures that will assist them in meeting additional regulations, such as Dodd-Frank Act. Banks will also be able to unify systems, such as integrating data marts, improve data quality, and reduce licenses, which will thereby drive efficiencies. In addition, even though the cost of implementing Basel III programmes are high, banks can also use them to streamline their functional, operational and technology processes, leading to reduced Total Cost of Ownership and improved competitive advantage in the long run. After all, when a bank is able to effectively maximise its liquidity, it can invest towards growing its business and service all its stakeholders – customers, shareholders, and employees.