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What Basel III means for banks IT

Basel II regulation focused on the consolidation and measurement of risk. Financial organisations built IT systems that gathered ‘exposure’ information, analysed it and calculated the measures required by the Basel accord. Basel III addresses two areas of regulation – solvency and liquidity – thereby ensuring that banks have sufficient capital to return deposits in the event of a crisis, are able to survive a protracted liquidity freeze, and are less dependent on the vagaries of short-term credit markets. With capital ratios agreed and the liquidity ‘framework’ entering an observation period, banks now need to assess the impact Basel III will have on their existing IT infrastructure and review the technology investment which is needed to be compliant.

The technology impact 

The technology investment required to comply with Basel III will largely depend on the level of investment made by a bank to meet Basel II regulations. If a bank has already built a fully functioning and auditable risk management and measurement system, it will only need to make incremental investments to be compliant with the ‘solvency’ part of Basel III. However, to meet the ‘liquidity’ element of the Basel III regulation, the investment could be much higher. (For the UK, estimates are around £500 million).

Strengthening the capital framework

The technological impact of the ‘solvency’ element of Basel III can be rated as medium. For example, the changes in capital levels won’t entail significant change to the existing IT systems, nor will the changes in capital reporting, especially if banks are compliant with Basel II.  The changes in Risk-Weighted-Asset calculation – where most of the Basel II IT money was spent – will mostly involve incremental changes to models and data, plus possibly the building of systems for specific exposures that weren’t considered before, or where new regulations will change their treatment dramatically. For example, the CVA calculation (Credit Value Adjustment), which implies a capital charge for the deterioration of asset quality (e.g. rating downgrading) as opposed to straightforward counterpart default risk.

Introducing global liquidity standards

Conversely, to meet liquidity reporting requirements it would entail making a significant IT investment, as this would involve the aggregation of all cash-flows across the bank (both asset and liability) to ensure funding is available at all times. Existing IT systems and data warehouses built for Basel II don’t have the capability to provide enough information as most data gathered is from the asset side of the business. Additionally, Basel II compliant databases were mostly based on “batch” processes, and although to calculate regulatory ratios batch would be enough, banks will need to look at building “real-time” capabilities to measure liquidity risk at all times.

To comply with Basel III, data quality will be the biggest challenge. IT systems will need to have the functionality to produce consistent and accurate data based on multiple models and real-time calculations, which correlate across divisions and asset classes. The IT infrastructure will have to be robust enough to deal with data integrity, usability and be compliant. It will also need to be flexible enough to build quick interfaces and reporting systems for other external financial systems and standard feeds as applicable.

The good news is that the investment in technology and IT infrastructure for Basel III could realize other positive benefits for banks through data analytics at very little incremental cost.

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This content is provided by an external author without editing by Finextra. It expresses the views and opinions of the author.

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