Harrumph, so much for the big Basel III deadline of January 1 2013.
Hardly any of the big international banks were ready in time, so what happened?
The Basel Committee changed the rules, that’s what happened!
It was only a few days into 2013 that the BIS issued a press release announcing amendments to the new liquidity requirements, effectively making them less stringent. In the changes of January 6 the Committee widened the definition of high-quality liquid assets (HQLA), so that some equities, mortgage backed securities, and corporate bonds rated BBB or better can now count towards fulfilling 15% of the Liquidity Capital Ratio (LCR).
All this change follows months of persistent complaining and lobbying from the banks. When it came to the crunch, the Basel Committee didn’t have the balls to stand up to them. The argument put forward by the banking industry is that as they originally stood, the Basel III regulations would have forced banks to reduce lending just when the global economy needed it most in order to fuel an international economic recovery.
Mervyn King, Chairman of the Group of Governors and Heads of Supervision (GHOS) and Governor of the Bank of England (until summer 2013, that is), tried to put a positive spin on the changes, saying
The Liquidity Coverage Ratio is a key component of the Basel
Is that really true? No one would be happier than me if the relaxed version of the liquidity requirements unleashed a global recovery in an avalanche of new lending, especially to hard-pressed small businesses and would-be home-buyers. Call me cynical, but I will only believe it when it actually happens.
Isn’t it just more likely that, now the Basel Committee have folded on these points, some of the other main pillars of the Basel III agreement will start to crumble as well?
When will the banks admit that tighter regulation is a key factor in protecting the global economy from collapse and in preventing any future bailouts by governments and tax payers?
Why not just accept Basel III as an opportunity for some much-needed good PR? Why not adopt Basel III early and with good grace and show the media and bank customers that banks are not all arrogant and above the law. It’s time to take steps to regain public confidence, and gain some commercial benefits and the all-important competitive edge into the bargain. Invest in Basel III compliance and you will also be making a sound investment in risk management, data control and better management reporting systems.
How do the minimum liquidity requirements work?
ReplyDeleteI mean lets say you've got somewhere around the minimum, and then there's some catastrophe that requires you dip into your liquid reserves, you're then below the minimum... do you not then get screwed over for using your reserves for exactly what they're meant for? Is there some leeway period where they're given time to rebuild their liquid assets?
Hi James
DeleteGood question. You are right, that is exactly what reserves are intended for. Under those circumstances, there would be no sanctions taken against a bank. According to the BIS on LCR rules:
"The GHOS agreed that, during periods of stress it would be entirely appropriate for banks to use their stock of HQLA, thereby falling below the minimum. Moreover, it is the responsibility of bank supervisors to give guidance on usability according to circumstances".
Here's a link to it http://www.bis.org/publ/bcbs238.html
What role do you feel that processes automation around efficient data capture, validation, processing and reporting workflow procedures will play in ensuring that banks meet their new reporting requirements in Basel III?
ReplyDeleteAll the major banks appear to now recognise the advantages of true front to back process reengineering to improve insight and reduce the risk associated with manual data processes, complexity and cost.
Hi JPD
DeleteThanks for the question. I would say that an accurate, efficient, dedicated IT system is central to meeting the new reporting requirements: I don’t see how any institution could possibly achieve full legal compliance without one.
I am not entirely sure what you mean by ‘front to back process reengineering’, but I wholeheartedly agree that by installing a Basel III reporting system senior managers at the banks will reap huge advantages for themselves too. The new reports are not just for the regulators: managers will be able to access and act upon up to date information on both risk and performance in real time, which should give them substantial commercial advantages.
A judicious investment in holistic risk management will also go a long way to restore consumer confidence, as customers will see that the banks are working hard to meet the increasing stringent regulations and restore satisfaction, confidence and trust.