Basel IV: No time for banks to take their foot off the pedal

AxiomSL | Basel II & III

January 16, 2015 – By Kassi Assamoi, Senior Manager, Regulatory Analysis, EMEA

Regulation of the financial markets is a never-ending process of modification, improvement and extension. Nowhere is this clearer than in the case of the Basel Accords.

It is now five years since the Basel Committee on Banking Supervision developed Basel III in response to the global AxiomSL - Basel IVfinancial crisis. In the intervening years, the Basel Committee has decided the requirements of Basel III leave room for improvement and has set about updating them. The modifications the committee is developing are so significant they have been dubbed (you guessed it) ‘Basel IV’.

So what is the changing? The answer can be broken down into four topics – operational risk, market risk, credit risk and large exposures. In each case, the Basel Committee wants to enhance the methods banks must use to calculate their risk.

So far the committee has:

The ‘Basel IV’ reforms are scheduled to come into force from 2017 onwards. This may seem like a long way off – and banks certainly have enough work to be getting on with in the meantime. However, the changes that will be introduced by ‘Basel IV’ are so fundamental they require close attention now.

The consultation papers that have been published make it clear that ‘Basel IV’ will have an impact not only on the way banks set up and run their risk calculations, but also on the data they use and the data they report.

The ‘Basel IV’ risk calculations are complex. For example, the plans to make the standardized model for market risk more similar to the internal model will increase – not reduce – the complexity of the calculations. As the calculations become more complicated, they will place greater demand on the performance of banks’ compliance software.

In order to run the new calculations, banks will need new types of data. ‘Basel IV’ introduces new data definitions and requires more granular data and higher data volumes than Basel III. Banks need to consider whether their data management infrastructure offers the flexibility and scalability to accommodate these changes.

Finally, new calculations will mean new outputs. As a result, banks will need to ensure they can easily implement new reporting templates and quickly respond to regulatory demands for new information about their trading books, exposures and own funds.

When it comes to the Basel Accords, it is clear nobody can afford to rest on their laurels for long.

To discuss this article further, please contact:

emea@axiomsl.com

Basel II & III

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