September 15, 2010 – Financial firms will need to adopt stronger enterprisewide data and risk management policies to comply with the latest set of guidelines to be issued by the end of this year by the Basel Committee on Banking Supervision.
That’s the stance taken by Celent, a New York-based research firm in a report issued on Tuesday entitled: “Basel III: Hearing the Rumbles of the Next Regulatory Tsunami.”
The new Basel III guidelines, which will be phased in between January 2013 and January 2019, strengthen the capital requirements and risk management requirements for counterparty credit risk exposures from derivatives, repurchase agreements and securitized financing activities. They also introduce new liquidity standards and supplement risk-based capital requirements with a gross leverage ratio.
The comment period on Basel III, the new and improved incarnation of Basel II ended April 16 and the Basel Committee hopes to release final documents by the end of this year. The United States has yet to adopt the guidelines of the second Basel Accord, initially published in 2004, and has not set a timeline for the adoption of the third set of guidelines.
“The previous Basel II agenda and subsequent implementations at a firm-level unveiled inherent shortcomings of antiquated risk systems and siloed approaches,” wrote Celent analyst Cubillas Ding. “This led most firms to adopt a centralized approach towards housing risk and financial information. In many ways, Basel III requirements look to be building on top of (not apart from) what Basel II demands of financial firms.”
Ding cites the potential requirement for more explicit liquidity stress testing and reporting as having a “medium to high” implication for IT and operations work It will require data integration- the collection of data -- across multiple systems, product lines and business units.
Also having a “medium to high” implication for IT and operations work will be enhancing counterparty credit risk. “The increased focus on CCR processes and measurements requires a unified view of counterparties and customers and centralized collateral management with core trading business instead of at the product level,” says Ding.
He warns that senior business managers need to start communicating with their technology teams to make the proper technological investments early.
“Financial services organizations can learn from recent sweeping regulatory mandates such as Basel II, Sarbanes-Oxley, Solvency II and Anti-Money Laundering, where companies that were successful responded by forming cross-functional teams working in a SWAT team mode- breaking down business as usual barriers to accelerate implementation activities.”
While Ding does not specify just how much it might cost a bank to prepare for Basel III, some software experts have cited figures as high as $100 million spread over as long as a decade.
This story originally appeared on Securities Technology Monitor.
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