Basel III

The aftermath of the global financial crisis called for a fundamental reconstruction of the approach towards risk and regulation in the financial sector. The Basel Committee on Banking Supervision (BCBS) has reached an agreement on reforms which aims at developing a more resilient banking sector. To assess the impact of these reforms, BCBS has conducted an impact analysis (Quantitative Impact Study), collecting information from 263 banks around the world.

Having worked on Basel II implementation with several banks around the world, we have a well- defined framework in place for the gradual implementation of the revised regulations.

Our framework consists of the following three phases:

Impact Analysis

We understand that banks have different capacities and, therefore, propose conducting a thorough impact analysis on an individual, bank specific level. We propose to assess the bank’s response to the following reforms:

  • Definition of Capital: The new minimum standard is set at 4.5% for CET 1 and this ratio, when combined with the Capital Conservation Buffer of 2.5%, increases to 7%
  • Proposed changes in Risk Weighted Assets
  • Leverage Ratio of banks must meet a minimum of 3%
  • Revised Liquidity Ratios including Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR)

Preparedness Strategy

Given the revisions brought about in Basel III, banks will need to have a strategy in place to achieve compliance by 2019. At Aptivaa, we propose providing assistance to banks with a clearly- defined strategy to prepare them for making the gradual shift towards Basel III compliance.

This preparation involves:

  • Conducting thorough Data Gap and Data Quality Assessments to eliminate all possible data availability and credibility issues during implementation
  • Reworking existing systems to improve data reporting and daily risk calculations
  • Establishing a comprehensive Enterprise Risk Data Warehouse for integrated reporting requirements
  • Incorporating a comprehensive ERM Architecture within the bank
  • Establishing strict and well-defined Data Governance practices
  • Working towards generation of required capital for the inclusion of Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) as part of the Liquidity requirements specified in Basel III
  • Gradual infrastructure builds to better gauge the new Counterparty Credit Risk reforms

Implementation Roadmap

The Basel Committee on Banking Supervision (BCBS) has laid out the timeline for banks to gradually make themselves Basel III compliant. BCBS expects implementation to begin in 2013 and foresees banks being fully Basel III compliant by 2019.

We propose to prepare the banks for the gradual implementation process, making sure the progress adheres to the regulatory timelines.

  • We help banks develop templates to track the Leverage Ratio and the underlying components
  • We help banks develop templates and supervisory monitoring of the Liquidity Ratios
  • We will make sure banks begin incorporating the higher minimum capital requirements in 2013 and ensure their full implementation by 2015
  • We will ensure that banks begin gradually phasing in the Capital Conservation Buffer of 2.5% in 2016, which is to be included along with the Common Equity Tier 1 (CET 1) ratio. We aim towards full implementation of the Conservation Buffer by 2019
  • From a Liquidity point of view, we advise banks on the required generation of short term and long term capital for calculation of LCR and NSFR