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Basel III: Trust the rules

Basel III is setting the precedence for re-establishing the rules, as a result of the fall out of the financial market post-2008.  The key aspects – tighter rules for tier-one capital, higher ratios of tier-one capital  in relation to risk-weighted assets, new borrowing ratio relative to tier-one capital, new liquidity provisions, and measures to limit counterparty risk – have an underlying message: rebuild lost trust through greater transparency.

To survive and be compliant by 2013, the rules can’t be ignored, but how do you introduce this message into an organisation so that executives and personnel change their way of working now, and not in two years time? WSJ’s, The Source, reported that by Credit Suisse’s calculations, if the banking community  continues to recover as it is, and it complies with Basel III, Europe’s banks should have excess capital of around €185 billion by the end of 2012. Although a good sign of economic recovery, this means banks will have more spare cash available to take risks with, and that the need to set the rules now is even more pressing.

So what top tips, or pieces of advice, can be given to stay on the right side of the ‘rules’?

Don’t over extend the business

Back in 2008, Western banks, which usually held up to 20 per cent of their total assets as core capital, did not hesitate to over commit themselves and found themselves in situations where core capital came down to less than 3 per cent of their assets.  Moreover, liquid assets among these accounted for less than 10 per cent!  This simply meant that these banks did not have enough buffers to find a way out of the financial crisis.  Bankers should ask: “Do I have enough of a buffer in place to cover my investments, am I covered if the investments don’t work out?” 

Stay informed

It’s imperative to keep your finger on the pulse and stay informed about the latest developments in the business.  Lehman Brothers had a Risk committee (supposedly one of the strongest of its time), which only met twice a year! You might have all the state-of-the-art risk management and compliance systems, but if your risk team is having limited interaction with the day to day activities of the entire firm, you might find yourself way behind the curve. Ask yourself “does your organisation have its Governance, Risk & Compliance systems in order?  Has your organisation revamped its risk and compliance departments to meet these new challenges?” While compliance frameworks can help the organisations collect data related to risk and generate reports for compliance, only the management of the organisation can set up a governance process to analyse the data which has been collected and take appropriate corrective action to manage risk. 

Stress testing

Putting your organisation through its paces by running fire drills can go a long way to identifying vulnerabilities. How much stress testing does your bank do?  Stringent Stress tests and scenario analysis are crucial in averting liquidity problems in this credit crunch hit environment.  Does your organisation have the strength to resist the pressure of another financial crisis? 

Small oversights related to these areas might snowball into uncontrollable situations if you’re not compliant and don’t communicate to staff. Organisations can safeguard against much of this and rebuild lost trust by ensuring greater transparency in their organisations. This is probably the reason why regulatory compliance is and will continue to be one of the highest areas of technology spend in banks.

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Comments: (1)

Nikhil Mittal
Nikhil Mittal - Wells Fargo - Charlotte 20 December, 2010, 08:20Be the first to give this comment the thumbs up 0 likes

Few thoughts open for discussion in this forum:

1. Many of the Indian banks with considerable amounts of AUM (Assets Under Management) have still not fully subscribed to Basel II, Isnt it that if the big global counterparts start subscribing to Basel III, how would our banks strike a balance in cross border deals.

2. Couple this with the upcoming IFRS subscription, And the amount of IT scalability or refinement would be needed

I am sure a lot of change is round the corner and is something we will be looking forward to.

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Innovation in Financial Services

A discussion of trends in innovation management within financial institutions, and the key processes, technology and cultural shifts driving innovation.


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