Supplying the Demand for Basel IV

While the completion date of Basel III is fast approaching, investment bankers, analysts and industry individuals alike are already speaking of the rumours and challenges of an upcoming Basel version – the Basel IV. In fact, it has been described as ammunition to ‘make a grown banker cry’.

Basel III is a revised regulation which aims to ensure that firms can withstand a certain level of risk, and requires a minimum level of capital and liquidity held so as to protect against insolvency. Progress made for Basel III is substantial; by 2014 the 100 largest international banks all met the minimal capital requirements ahead of the 2019 deadline.

Although, thanks to the introduction of seemingly never-ending regulation, more and more items are being brought to the forefront for consideration; resulting in banks having a long way to go to ensure they are fully compliant with the reform of Basel III, which some bankers are branding ‘Basel IV’.

The key themes underpinning Basel IV are:

  • Less reliance on internal risk models, ensuring a higher level of consistency across the industry

  • Increased disclosure from banks

  • Larger capital buffer

Meanwhile current portfolios are being adjusted to reduce the amount of risk held on their trading books.

This brings rise to numerous challenges from the bank’s perspective: namely time and money.

In early 2016, it had been estimated that it would cost banks $100 -150bn each to implement fully over the next three years.

In addition to the billions of dollars set aside in the form of capital buffers, there is further expectation to cut costs as a result of the current difficult economic climate - undoubtedly a huge source of frustration to investment bankers around the globe.

However, a recent study performed by one of the ‘Big 4’ shows that banks have the potential to cut up to 25% of their current expenditure, which indicates that there is hope yet. Hope in the form of potential outsourcing. Outsourcing has traditionally related to roles within Technology/ IT/ Legal, but more and more firms are transferring out their Risk Reporting, Regulatory and Operations functions. Onshore outsourcing allows for BAU roles to be performed within the client’s legal and regulatory environment. Concerns relating to confidentiality of the bank’s sensitive data are now mitigated through secured technology infrastructure and confined client spaces. Outsourcing provides an opportunity, for both vendor and client, to work in collaboration to determine the client’s needs, and to provide a high-quality service for a fixed cost.

The aim of the multitude of Basel regulations is to provide a foundation of risk awareness to firms worldwide and banks have hired tens of thousands of regulatory staff to ensure compliance with the current set of rules. However, with the revised set of rules, banks will be required to provide more disclosure to the regulator to increase transparency; with that comes increasingly more report generating, more KRIs - more demand for data in general. Hand in hand with risk reporting, comes a huge amount of time spent. Analysis performed by one of the ‘Big 4’ shows that a surprising two thirds of the industry’s time is spent on data gathering, which in turn leaves less time for understanding and communication of risks; both underlying aspects of any solid risk culture. Outsourcing can demonstrate value add in the form of process re-engineering through automation of data gathering; resulting in increased productivity and efficiency – allowing the business more time to focus on their risk culture, firm strategy and market challenges.

In a time where optimising capital is a necessity and business models are undergoing a refresh - outsourcing is the answer to future regulatory demands, and to ensure compliance with the evolution that is the current regulatory environment today.

[1] Financial Times – ‘Basel IV spectre looms for battle worn bankers’

[2] Financial Times- ‘Global banks reach almost all 2019 capital standards’

[3] Financial Times – ‘Basel Committee softens new rules on bank capital’ - KPMG - Rob Smith

Claire Henry

Claire joined FinTrU in 2014, having graduated from Queens University Belfast where she gained a BSc in Mathematics, Statistics and Operational Research. Eager to immerse herself in the world of Finance, Claire joined as one of FinTrU’s initial employees in the company’s first FinTrU Financial Services academy cohort. Through the 2 year graduate programme, Claire developed a number of key skills and has successfully completed the IOC financial regulation exams.

During Claire’s time at FinTrU she has worked on a Non-Market Risk project within the Fixed Income division of a Tier I Investment Bank, with a predominant focus on Operational Risk. Key aspects of Claire’s role involved risk reporting, with an emphasis on issues and actions tracking. Claire was solely responsible for the collation of data and creation of monthly Operational Risk packs on a global basis, which was utilised to encourage the collaboration and communication of key risks between functional groups and the NMR team.

While working on this role in a BAU (Business as Usual) approach, Claire identified and helped implement automation solutions using a variety of in-house systems to reduce the manual effort on data cleansing activities, while undertaking UAT which involved assisting with multiple tasks pre and post data migration, resulting in a significant value add for the client.

Claire has recently transitioned onto a Project Management role for an alternative investment bank, as part of a remedial project defined by current regulatory demands, with a primary focus on Risk Model Validation and Stress Testing of key risks which the firm is subject to.