RiskTech Forum

Implementing Basel III Are you ready?

Posted: 3 January 2013  |  Source: Wolters Kluwer


Are you ready?

This paper gives an overview of the imminent regulations pertaining to becoming Basel III compliant, particularly those centered on reporting. It aims to provide a current snapshot of how global adoption is progressing to date. It will be especially relevant to those tasked with compliance, risk and regulatory reporting within banks.

The perfect regulatory storm

The new regulatory regime of  Basel III goes live on 1 January 2013, for both reporting and the new minimum capital requirements. Indeed from as early as this summer, banks are expected to capture and report on key aspects of the new ratios, despite the fact the new EU directive and regulation have yet to be finalised in readiness for the 2013 live date.

Banks will have to meet the following minimum capital requirements expressed in risk-weighted assets: 3.5% share capital, 4.5% Tier 1 capital and 8% total capital. Preparationfor the new reporting and stress testing requirements must be largely complete by the end of 2012.

Other measures to be implemented by the beginning of 2013 include new regulations for counterparty credit risk and minimum core Tier 1 ratios, and new treatment of banks’ short-term liquidity.

With deadlines looming, taking a ‘wait and see’ approach is no longer an option. Despite this, much is still to be finalized. The banking industry is awaiting the publication of:

Implementation on the fly

Although institutions  that have implemented Basel II are likely to fare better than those further behind the curve there is still much added complexity arising from the stricter data quality, more frequent reporting and greater aggregation of risk IT and operations, as required by Basel III. Furthermore the timelines for Basel III are much tighter. However, important parts of the framework, such as the capitalisation levels of bank central counterparty default fund exposures, have still not been finalised or, like the rules on systematically important financial institutions, have only been recently been published, with little time to respond to the changes before going live.

The long transition period outlined for Basel III with the last of the ratio changes not being imposed until 2019 – is a bit of a misnomer as many jurisdictions, particularly in Asia, aim to go fully live years before this and banks hope to have the systems that are compliant with the new regime built by the end of 2013.

Banks have the European Banking Authority (EBA) Quantitative Impact Study (EU-QIS) as a guide, but changes are still being made to the final reporting templates and it is not clear what the final mandatory requirements will look like. As a result, banks are having to make some tactical, rather than longer term strategic decisions to meet deadlines, perhaps resulting in temporary, but not completely satisfactory, solutions.

This time it’s serious

The current expectation of the European Commission is that the legislative negotiation process will have concluded by summer 2012 and the proposed date for the Capital Requirements Directive (CRD) and the Capital Requirements Regulation (CRR) legislation to become binding on banks, building societies and credit institutions is 1 January 2013.

CRD IV, which is in fact a combination of the CRD and the CRR, and how Basel III will be implemented, will actually go beyond Basel III and bring in proposals on non- compliance sanctions, corporate governance and remuneration. What is clear here is that, regardless of the penalties for non-compliance, which will come, there has been a sea change in the attitude of Basel III regulators.

Past regulations needed to be transposed into national law, whereas the regulations coming out of Brussels now, do not. They are direct and immediate, with very little room for national discretions. What is different this time is that the EU is set upon achieving uniform implementation and National Supervisory Authorities are losing much of their discretionary power under the Single Rule Book.

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