Basel IV Opportunity: COVID-19 As The Impetus For Constructive Change

A Glass Half Full Perspective

The COVID-19 pandemic offers a catalyst for financial institutions to generate fundamental structural change as they seek to implement Basel reforms and make positive changes amid a negative situation. With the global economy inexorably heading towards a new normal, it is now more important than ever for financial institutions to thoughtfully prepare their strategic medium- and long-term plans and be ready for what the future might bring.

Basel IV Opportunity: COVID-19 As The Impetus For Constructive Change

A Far-Reaching Impact of Basel IV

Dubbed “Basel IV”, Basel III reforms are not just the most recent set of Basel requirements that will necessitate careful implementation by financial institutions; they are much more. Revisions to the original Basel III framework will change almost all approaches to calculating risk-weighted assets (RWAs), which dictate how much capital banks need to hold against credit risk, market risk, and operational risk. The Basel IV rules seek to narrow the gap in RWA outcomes between the internal ratings based (IRB) approach and the standardized approach (SA). This could have a far-reaching impact on the business and operating models of financial institutions, particularly in the age of COVID-19 and beyond.

Reprieve Gives Banks More Time To Strategize…

Recognizing the severity of the crisis affecting financial institutions along with the challenges of Basel IV, the Basel Committee’s oversight body has deferred the implementation dates of the outstanding standards by a year – to 1 January 2023. The reprieve acknowledges the severity of the crisis facing financial institutions. On the flip side, it gives banks more time to take a strategic rather than tactical approach.

…But There Is A Lot To Consider

The actual implications of Basel IV will depend on the portfolio structures and business models of individual banks. And COVID-19 adds a new dimension to the process, requiring revised scenario planning to assess the full impact of the pandemic. In addition, new data management and reporting will also be needed, making it increasingly critical for banks to adopt a holistic approach. To address these challenges, institutions need to optimize their resources, including adapting technology-driven and flexible data management, regulatory reporting and audit processes.

How To Get To Half Full And Not Half Empty

Under Basel IV, several calculation and reporting obligations will become more complex, increasing the need for powerful architectures that provide the foundation for a range of complex Basel-related capital and liquidity calculations. Implementing AxiomSL’s flexible data dictionary architecture, seamless calculation updates, full drilldown to data and processes, transparency into model calculations, and complete, dynamic data lineage strengthen an institution’s regulatory reporting processes, end-to-end. The ability to identify and deal with data overlaps, coupled with access to organization-wide granular data will ultimately inform better internal practices and generate positive changes in business models. This will arguably lead to the creation of an enduring competitive advantage over time, just as the new normal sets in. With AxiomSL’s proven technology, organizations can satisfy requirements and deliver the data integrity and auditability that regulators demand in an ever-changing regulatory landscape.

Viewed through the right lens, the challenges of Basel IV and COVID-19 can readily become an opportunity for constructive change.

This blog previews the full article you can read here.

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