Basel III Not the last Regulation of its Kind

Scheduled for implementation between 2013 and 2019, Basel III takes over from its predecessor Basel II. But while the new Basel framework is meant to strengthen the management of international banking risks and thus protect bank’s customers and global financial markets, it is certain that Basel III will not be the last major regulation thrust on the banking industry. Already, banks in some jurisdictions have to deal with additional rules such as IFRS and the Dodd-Frank Act with more likely in the pipeline as the full impact of the 2007-2009 financial crisis comes into proper perspective.

Given that future changes to banking regulations post-Basel III are inevitable, banks’ data architecture and systems infrastructure must be agile and flexible enough to accommodate new rules with minimal cost. For this to happen, organizations must treat risk management as a legitimate business process incorporated into day to day operations.

Transitioning from Basel II to Basel III - What is the Cost and Implication?

Like any other regulation that affects institutions in different countries, the cost of moving to Basel III will vary from organization to organization and country to country. For instance, there is more than one way to calculate the RWA (Risk Weighting of Assets) for credit, operational and market risk so as to comply with Basel III. The models and methods used can vary considerably each with differing levels of sophistication. Model and method sophistication in turn impacts cost.

In addition, the technological cost of readying for Basel III compliance must be viewed in the context of banks differing levels of preparedness. Certain banks may have started off with a less sophisticated internal risk management framework even though they may in actual sense have already been in compliance with Basel II. If you compare such banks with a bank of a near similar sized operation but with a more advanced framework, it may cost substantially more for the less prepared banks to come up to speed with Basel III analytics and reporting requirements.

For banks (e.g. those in the US) that face overlaps between Basel III implementation and other emerging regulations such as the Dodd Frank Act, taking advantage of the technology upgrade and process changes to (where possible) address all two or more new bodies of banking rules is a plus. The downside though is that amalgamated costs due to simultaneous implementation can make it difficult to accurately account for costs associated with the different bodies of rules.

Smaller banks also have to contend with a different but no less significant problem - diseconomies of scale.

Avoiding the Pitfalls and Building on the Strengths of Basel II

Despite its extensively discussed loopholes, Basel II was a success on several fronts not least of which was its driving banks toward a more holistic view of risk a la enterprise risk management. Basel II fell short in clearly articulating the connection between risk management activities and day to day banking operations. It can be argued that one of the main reasons for the financial crisis of 2007-2009 was banks giving free reign to growth and investment activities while only giving token consideration to risk management. Risk management must be moved from the periphery to the mainstream components of strategic, tactical and operational decisions.

Together with enterprise risk management, Basel II also drew greater emphasis on the management of data. In the process of identifying, collecting and processing data, banks would often stumble upon control gaps and inconsistencies. The logical consequence was that banks threw enormous amounts of cash towards the purchase and upgrade of technology infrastructure in the knowledge that efficient data management bode well not just for regulatory compliance but for the business itself.

Basel II saw the acquisition of expensive technology primarily for regulatory reporting. In Basel III, banks must steer technology infrastructure not just toward compliance but also to ensure better risk management in day to day operations. For this to be realized, international banks must sift through all enterprise processes, systems and data while guarding against the duplication of information. Granulation of data is vital and this may necessitate having multiple data warehouses each hosting a specific category of data.

Key Impediments to Getting the Data Infrastructure Right

Legacy systems, ring fenced processes and business units/divisions working in silos are probably the biggest obstacle banks must surmount as Basel III looms. Different divisions of the same organization may be making decisions that duplicate systems and efforts because they are oblivious of what the each is doing. To surmount these formidable challenges, Basel III must be implemented as part and parcel of line business processes as opposed to as a separate project. This is likely to reduce overall business disruption, enhance organization-wide visibility, hasten compliance, lower implementation costs and ultimately improve the risk and control environment in the bank.

Author's Bio: 

Graz Sweden AB provides financial services players with the most cost-effective way to access, manage, and analyze their data. Using the flexible data management platform HINC, Graz’s data warehouse infrastructure helps manage tens of thousands of investment portfolios for several institutions including 9 insurance companies, 120 banks and the largest fund manager in Scandinavia. For more information, visit