The banking sector is heavily regulated, and for good reason: the banking ecosystem is the guardian of the rails of modern commerce and individual wealth. As such, banking regulations must be kept current to reflect changes in this critical infrastructure. A recent call for regulatory action came from the Federal Reserve in response to recent bank failures, such as SVB. The Federal Reserve announced regulatory changes for institutions with assets of $100bn or more. As part of this, the Federal Reserve called for the enhancement of Basel III. It warned banks to "refresh their regulatory roadmaps to include preparation for a likely expanded regulatory agenda over the coming years.”
Eastnets looks at the current state of Basel III and what impacts this may have on transparency and reporting.
How can banks use regulatory reporting to keep abreast of changes in the banking regulation landscape going forward?
Overview of Basel III
Basel first appeared on the banking horizon after the banking collapse of 2008, with the regulation being brought in to tighten the grip on risk management. Since then, banks worldwide have acted and implemented Basel's stringent requirements to manage capital, market, and operational risk. Basel requirements continue to be updated to help shield the banking sector from the severe banking crisis experienced in 2008. The Basel Committee on Banking Supervision (BCBS) is responsible for developing and enhancing Basel.
Basel III was implemented on 1 January 2023, after a one-year deferral, but has a five-year phase-in. Basel III builds on and enhances the three pillars of its predecessors, Basel II and Basel I: Regulation evolution is expected in the financial sector, where digitization has driven innovation. The new Basel III regulations will affect all banks. However, the severity of the impact will differ according to the type, scale, and location of banks. Importantly, Basel III will require FIs to gather large amounts of data from across their business to assess risk, ensure they are within the prescribed boundaries, and submit regular reports to regulators to establish evidence of compliance.
The three pillars of Basel III
Basel III is an international regulatory framework to help ameliorate risk in banking and strengthen management and supervision. To achieve this, Basel III uses three core pillars, each being associated:
Pillar 1: Minimum Capital Requirements. Basel III has enhanced requirements for the minimum capital required by banks).
Pillar 2: Supervisory Review Process. Basel III is enhanced for Firm-wide Risk Management and Capital Planning
Pillar 3: Enhanced disclosure (Discipline of market). Enhanced risk and disclosure expected for Basel III compliance.
While all pillars come with their challenges, Pillar 3 is of exceptional interest as this is a pivotal pillar supporting Pillars 1 and 2 with a broad range of expected disclosures. As such, this level of data management can challenge risk and finance teams, who need access to centralized, up-to-date, and accurate data to comply with Basel III. Pillar 3, Market discipline through regulatory reporting and disclosure, can become an Achilles Heel for any bank not readied.
Main reporting and data challenges of Basel III
Regulatory liquidity risk reports will have to be produced at least monthly. However, some conditions could require (when requested by the regulators) that reports are delivered weekly or even daily. This is challenging for banks to use robust automated reporting solutions to meet this need.
The European Banking Federation (EBF) has regular meetings to discuss the disclosure requirements of banks under Basel III. One of the areas that could cause issues are misalignments between datasets. Data quality is vital for accurate reporting. If these data are out of sync, the resulting report is inaccurate.
Data reconciliation and clean-up are core requirements for accurate reporting but are also challenging to resolve. Banks must consider using specialist tools like Eastnets Messaging Warehouse to ensure data quality and accurate, reliable reporting.
Benefits of Basel
Basel III aims to promote greater stability in the international financial system by making banks more resilient to shocks and helping manage the severity of future financial crises. Benefits from the stringent regulatory requirements of Basel III include the following.
- Strengthens the capital and liquidity of banks, reducing the risk of bank failures and bailouts, which can otherwise have negative consequences for taxpayers, depositors, and borrowers.
- Enhances transparency and disclosure of banks' risk exposures and activities, thereby improving customer confidence and banking profile.
- Harmonizes the regulatory framework across jurisdictions and potentially facilitates cross-border banking and competition, lowering the cost of financial services.
Criticism of Basel III
A 71-page IMF working paper, published soon after the Basel Committee on Banking Supervision issued Basel III, pointed out several issues with the regulation, including several overly complex areas and incomplete disclosure requirements. Since then, several other influential criticisms have targeted Basel III implementation. One study by OECD, "Macroeconomic Impact of Basel III," warned of a decrease in GDP growth of -0.05 to -0.15 percent per annum due to Basel III implementation. Regulatory reporting software solutions can help to reduce this complexity. These tools provide centralized management and insight into banking data and automate reporting.
How Eastnets helps banks comply with Basel III
Eastnets Messaging Warehouse is a risk management technology for comprehensive, Basel III-compliant regulatory reporting. The Messaging Warehouse offers instant access to live and archived data from a centralized repository. Dashboards are used for on-demand and scheduled business and technical reporting. Messaging Warehouse has API integrations to banking channels and monitors traffic, triggering real-time alerts. The solution handles vast amounts of data, automating analysis, investigation, and audit, providing fast, accurate, and efficient reporting tools.
Implementing Eastnets Messaging Warehouse to handle Basel III reporting requirements allows a bank to overcome some of the criticisms of Basel III and meet reporting requirements.
The Basel Committee continues to hold regular meetings to evaluate risk from a changing banking landscape, including any turmoil in the market, such as the recent bank collapses. In June 2023, a discussion looked at the risk to banking from crypto assets and climate risk. The final Basel III minimum requirements were implemented on 1 January 2023 with full phased implementation by 1 January 2028.
Eastnets technology future-proofs your bank against the changing tide of banking regulations.