Research & Thoughts

Basel III - We Could Get It Right This Time

What we can do differently for Basel III. And why we – probably – won’t do it!

Change: it won’t end with Basel III. That’s why banking systems and architectures need to accommodate frequent rule change-driven revisions, cost-effectively. Capco believes that Incorporating Basel III as part of the ‘business as usual’ (BAU) function is the sustainable way to deliver effective ongoing risk management. To discover more, download the full report.

We all know the Basel Committee on Banking Supervision has introduced ‘Basel III,’ designed to improve capital adequacy. It is less well understood that banks should now remove the silo architectures built under Basel II. Instead, they should harness more consolidated systems, processes and data. But, while cultural barriers remain deeply entrenched, the ideal will probably not materialize.

Banking systems and architectures need to be flexible and agile to accommodate frequent rule change-driven revisions cost-effectively. A positive new approach would look like this: build risk management and related processes & systems in tandem with the development of front office businesses, rather than as an after-thought; genuinely agree and drive developments at senior management level; accept, as professional financial risk-takers, that risk management is a legitimate and necessary part of doing business. Yes, there will be initial change costs. But this approach eases the burden, with a shift from heavy quasi-fixed set-up to marginal ongoing compliance costs.

Events of 2007-08 highlighted fundamental flaws in the regulatory approach. The possibility of a high volume of structured assets defaulting almost simultaneously, and the capital required as a direct buffer, were issues not adequately considered.

Ironically, liquidity risk was withdrawn from the proposed content of Basel II by mutual agreement between regulators and financial institutions in 2003. Excessive leverage was also allowed to build up.

In the aftermath the Basel Committee published Basel III (rules to be phased in from January 2013- 19), to strengthen the capitalization and liquidity of the global banking sector. Recognizing maturity transformation is at the core of a bank’s business, emphasis will be placed on higher quality of liquid assets as a buffer for the short-term, and on the financing of assets with more stable and longer term funding.

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