Basel III – What’s in for IT companies? What is Basel III?

Basel III is a global regulatory standard on bank capital adequacy, stress testing and market liquidity risks. Features of Basel III    Basel III proposes many new capital, leverage and liquidity standards to strengthen the regulation, supervision and risk management of the banking sector. The capital standards and new capital buffers will require banks to hold more capital and higher quality of capital than under current Basel II rules. The new leverage ratio introduces a non-risk based measure to supplement the risk-based minimum capital requirements.

What are Capital Adequacy / Capital Requirements? This is the standardized requirements in place for banks and other depository institutions which determines how much capital is held for a certain level of assets through regulatory agencies. Key Elements of Basel III 

Higher Minimum Tier 1 Capital Requirement – increases from 4% to 6% New Capital Conservation Buffer - Used to absorb losses during periods of financial and
economic stress (up to 2.5%)

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Countercyclical Capital Buffer – Extension to capital conservation buffer within the range of 0% - 2.5% Higher Minimum Tier 1 Common Equity Requirement – increases from 2% to 4.5% Leverage Ratio - A supplemental 3% non-risk based leverage ratio which serves as a

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Minimum Total Capital Ratio – remains at 8% Liquidity Standards introduces o Liquidity Coverage Ratio (LCR): to ensure that sufficient high quality liquid resources are available for one month survival in case of a stress scenario. o Net Stable Funding Ratio (NSFR): to promote resiliency over longer-term time horizons by creating additional incentives for banks to fund their activities with more stable sources of funding on an on-going structural basis

Diagrammatic Representation of Basel III Pillars Basel III Enhanced Supervisory Review Process for Firm-wide Risk Management and Capital Planning Enhanced Minimum Capital & Liquidity Requirements Enhanced Risk Disclosure & Market Discipline .

The next challenge banks face is interfacing or merging their current risk and finance systems to meet the new Basel III Liquidity Risk ratio requirements. International banks will have to cope with various national discretions and local flavours for such new liquidity ratio rules and will have to generate various kinds of liquidity risk regulatory reporting templates in different electronic formats per jurisdiction. Centralized risk data warehouse has to be enriched. to be delivered weekly or even daily.    What’s in for IT companies? With the introduction of Basel III standards:    All international banks have to enrich/newly create regulatory liquidity reports or disclosure reports. liabilities. .Major challenges of Basel III Few of the major challenges of Basel III are:  Regulatory liquidity risk reports will have to be produced at least monthly with the ability. With the introduction of liquidity standards. These attributes to functional as well as technical work for IT companies which can chip in with handling the functional aspects of Basel III along with technical work of enriching the data mart/ warehouse with more reporting requirements to follow. Primary challenge is to consolidate clean exposures. This is imposing banks to put in place robust automated reporting solutions to meet this need. banks have to introduce new measures to satisfy the regulatory requirements. when required by regulators. counterparty and market data in a centralized risk data warehouse.

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