Biting the bullet on Basel

It’s now six years since the Basel Committee on Banking Supervision published its final Basel framework (Basel 3.1 or Final Basel III), and after much consultation the dust has settled.

So now it is time to bite the bullet and get on with the job of complying with the rules on credit risk (standardised approach [SA] and/or internal ratings-based approach [IRB]), the standardised approach to operational risk (SA-OR), market risk (fundamental review of the trading book [FRTB} ), credit valuation adjustment [CVA] and so on.

Simply complying will require a considerable investment in time, money and talent. But some banks are looking beyond “simply comply” and into “turning compliance into performance”. There is a growing acceptance that final Basel III provides a baseline, a foundation on which to build resilience against financial stress and loss-absorbing capacity.

This being the case, firms should now take the opportunity to demonstrate that budgets are spent well and deliver a sustainable return on investment. If they don’t, there is a risk that a firm’s senior leadership will lose the competitive advantage of leveraging regulatory reporting requirements to increase profitability.

Here’s what we recommend:

1. Agree on the approach, get senior management buy in. Explicitly grasp this opportunity to address regulatory compliance while improving profits and competitiveness. Communicate the positive benefits of building a sustainable solution to senior management as well as the imperative of avoiding fines and supervisory displeasure. 
2. Realistically asses the costs. Firms should simultaneously carry out a realistic assessment of the cost of compliance. Underestimating it would be a huge error - least of all because it would put risk and compliance teams under greater (and possibly intolerable) stress. Factors that are likely to contribute to the overall costs include: data quality and enrichment especially with regards to the standardized approach, the state of the initial set up (IRB vs SA); the desired scope (from minimal compliance to performance benefits), size and complexity of the institution (multijurisdictions etc), as well as technology costs (see below)
3. Remove silos. Risk and regulatory compliance managers should build cross-functional teams (including, for example, finance, portfolio managers and treasury) that work within the context of a broader transformation of the business. These teams will be well placed to reach conclusions and advise on strategic decisions to revise the business model. 
4. Consider the cost of technology. In calculating the costs, it is likely that project leaders will find data and technology to be the biggest up-front costs, perhaps because most of the data is either unavailable or it is in a variety of legacy silo systems. By adopting SaaS approach banks can both tackle the big data challenges and get off the treadmill of constant regulatory compliance IT projects as the software is immediately updated whenever new regulatory requirements are published. Moody's have been helping banks to reap benefits of SaaS deployment of their reg compliance for years and can vouch for the overall value add.
5. Implement and reap the benefits. With the new streamlined and future-proof solution in place, firms can start to enjoy the business benefits. First, and most obviously, the Basel capital requirements will be correctly calculated avoiding holding excess regulatory capital. Second, firms will have a sustainable basis for more effective management of the business, for example through active portfolio management with more granular risk-based pricing and greater agility in stress-testing. 

In short, the final Basel deadline is fast approaching. But there is still time to make a virtue of necessity and reap the benefits of investment in a sustainable solution that not only meets regulatory requirements, but also supports the need for the business to be robust, able to identify new opportunities and grow profitably.