Basel III – a new way to think about bank regulation

Basel III

The pace of change has not slowed since the financial crisis of 2007-2008, as the Basel Committee on Banking Supervision seeks a better way to regulate banks through Basel III.

Marion Leslie Managing Director, Pricing and Reference Services, Thomson Reuters: Risk Data Aggregation, Reporting, Governance & Beyond

Basel III is constantly developing

The Basel Committee on Banking Supervision continues to drive considerable evolution in the regulation of financial institutions around the world. Basel III has become shorthand for a wide range of changes – some already complete and some still in motion – to credit risk, market risk, operational risk, liquidity risk, and risk governance.

The framework was begun in the wake of the Financial Crisis of 2007-2008 by the Basel Committee, which is an international organization of regulators who mutually agree the final approaches in each area. These approaches are then implemented in each jurisdiction by local regulators.

A fresh approach to bank regulation

As Basel III has emerged through dozens of consultation papers, quantitative impact studies, reports, working papers, and final documents, it is clear that what was originally an attempt to “fix” Basel II is now something much more.

It is true that the amount of capital that banks are now holding has increased significantly. However, the way in which regulators are approaching the supervision of banks has evolved – there is now considerable focus on risk governance and risk culture.

Supervisors are now considering banks’ business models and strategy. Additionally, supervisors are considering “macro-prudential” regulatory issues when crafting new rules.

The focus increases on risk governance

Risk governance continues to evolve under Basel III. The vision is for banks to have the right information at the right time to enable them to make the best decisions around risk issues.

This is much easier said than done – risk data aggregation is a struggle for most financial institutions, which are still coming to terms with BCBS 239 – the paper that outlines the principles for effective risk data aggregation and reporting.

Banks are turning to a range of approaches to solve these challenges. Entity risk data, as well as securities and issuer classifications, can help banks organize their own internal datasets, for example. Trusted pricing for a wide range of securities can make valuation of portfolios easier, and ensure organizations are holding the right amount of capital.

Operational risk headed for significant change

Basel III has also put more focus on the qualitative side of risk management. Operational risk is the last of the big areas of Basel II to be overhauled, and considerable changes in the Advanced Measurement Approach and Standardized Approaches are expected.

However, more broadly, regulators are now expecting financial services organizations to take a much more enterprise-wide view of risk management. Supervisors are now expecting firms to actively cultivate their risk culture, align business strategy with risk appetite, and demonstrate that they understand the connection between the risk choices they make and their financials.

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