Basel III – The International Regulatory Framework for Banks
The pace of change has not slowed since the financial crisis of 2007-2008, as the Basel Committee on Banking Supervision seeks to increase risk management, deal with financial stress and strengthen the banks’ transparency through Basel III.
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 to credit risk, market risk, operational risk, liquidity risk, and risk governance.
The framework begun in the wake of the Financial Crisis of 2007-2008 by the Basel Committee, an international organization with the purpose of enhancing financial stability by improving supervisory knowhow and the quality of banking administration worldwide.
A fresh approach to bank regulation
As Basel III has emerged through dozens of extensive research, it is clear that what was originally an attempt to “fix” Basel II is now something much more. Even though the amount of capital that banks are now holding has increased significantly, the way 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.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.
By seeing BCBS 239 as the starting line and not the finish line, banks will not only be better prepared to handle future market events, but will be able to do business differently.
This white paper explores the complexity surrounding RBA (Risk Based Approach), taking a look at how the Financial Action Taskforce (FATF) is addressing this and outlines the key risks that need to be addressed.
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