Avoiding a Faulty Approach to Basel III

The coming years are likely to prove a tumultuous time for the banking industry. While thankfully the worst of the economic crisis appears to have past, it’s unlikely that we will see a return to the boom years that straddled the turn of the century. Although, in light of the crisis that followed, even the most speculative of bankers would not advocate a return to a system that was widely criticised for its lack of regulation and accountability.

Much has been made of the government’s proposed banking reforms, with barely a day going by without a member of parliament voicing an opinion on the matter. The latest indications from the government appear to suggest that the legislation set to dramatically transform the banking industry may not come into effect for several years.

New Liquidity and Leverage Requirements

Much of the ongoing debate around governmental reforms, as well as the ongoing eurozone crisis has served to deflect attention away from the introduction of Basel III which will take effect across the world, introducing new requirements on liquidity and leverage, while requiring banks to strengthen their capital reserves.

The new regulatory requirements are likely to cause more than just a few ripples on the surface. Currently there seems to be a disconnect between the regulators and the industry it seeks to bring into line. Many banks are confused and frustrated by what they see as a shifting of the goal posts and are finding it challenging to keep up with regulatory changes.

There are a number of areas where the burden could be alleviated and where banks need to take action. One area that has come in for particular criticism is the level of guidance issued. The regulatory bar for Basel III should rightfully remain high, but the guidelines could be simplified. The number of pages currently issued stretches into the thousands and is deemed to be overly complex by many in the industry.

Engaging with Banks

Another way in which regulators could seek to better engage with banks, is by involving key industry figures in the decision making process. While it is difficult for regulatory bodies to compete with the industry itself in attracting top talent, more needs to be done to ensure key figures from the banking industry have an active role to play in the process.

Internally, banks need to look to simplify their processes and operations. Many banks rely on large teams, sometimes hundreds of people to manually update information to meet the regulator’s reporting requirements. Some have disparate departments using different information in a different way to deliver the same report. As the evolving regulations will require more senior level sign-off, this in turn will require a more joined up version of the truth.

The different sources of information and more complex assessments of risk and capital also mean that there is a longer lead time to develop products or go to market. A more joined up view of information and reporting would provide a faster time to market and a reduced reporting cycle. It would also allow Banks to respond to ad-hoc visits or request from the Regulator for use and evidence of the consideration of risk and capital.


What is certain is Basel III will not be going away, and waves of regulatory change will continue to batter the industry for the foreseeable future. At a time when banks find themselves at the very top of the news agenda they cannot afford to fall behind in preparation for these regulatory requirements and a failure to establish a sound foundation from which the banks can quickly respond to the changing demands could result in a costly own-goal.


Related reading