The Finalisation of Basel III: A Comprehensive Overview at the London RegTech Forum

The iconic Guildhall's Old Library recently hosted our esteemed annual RegTech Forum, in partnership with the City of London Corporation. This prestigious gathering convened a select panel of experts from leading banks, building societies, the tech industry, and regulatory authorities. The forum's objective was to illuminate recent transformations in the finance and banking sectors. Among the many enlightening sessions, the discussions on "The Finalisation of Basel III" and insights from Bill Coen, former Secretary General of BCBS, were particularly noteworthy. 

Basel 3.1 reforms  

The Basel 3.1 reforms have recently been a focal point in the regulatory landscape, and the session dedicated to its finalisation was both timely and insightful. This session delved into the implications of the new rules and the role of technology in facilitating their implementation. The Basel 3.1 regulations primarily target internationally active banks, mandating them to maintain increased regulatory capital reserves and rigorous risk management protocols. The criteria for their application hinge on a bank's size, international reach, and complexity, all aimed at fortifying global financial stability and mitigating systemic risks.   

A key point of discussion was the "output floor", a key element of the global Basel III reforms. A former regulator noted that this "output floor" stipulates that risk-weighted assets (RWAs) as calculated by a bank's internal models cannot fall below 72.5% of RWAs derived by using the standardised methods. This provision, a compromise among regulators, was designed to limit banks from overly reducing their capital requirements via optimistic internal models. This threshold has been an industry focal point, as it could elevate minimum capital requirements for some banks while fostering RWA consistency among banks.  

Another focal point was the significance of credit risk models in measuring, managing and mitigating lending-associated risks. While models are pivotal in setting regulatory capital requirements, the U.S. has proposed excluding their use for regulatory capital determinations. This stems from historical apprehensions and regulatory viewpoints, underscoring the preference for standardised methods. However, a panellist emphasized that U.S. banks are not precluded from using risk models; indeed, models remain integral to risk management and stress tests.  

With such transformative regulatory shifts, banks confront numerous challenges, particularly concerning data and operations. An industry expert stressed the importance of data consistency, cautioning against siloed operations. The need for comprehensive data traceability is evident, ensuring a bank’s ability to trace data back to its source. As regulations are finalised and may continue to change, banks must recalibrate their models and strategies to ensure smooth transitions. Financial constraints, especially IT-related costs, can be significant impediments. Operationally, the emphasis should shift from data cleansing to data analysis, ensuring initial data accuracy.   

The PRA's Banking Data Review initiative seeks to refine banks' data collections, aiding their adjustment to regulatory changes like Basel 3.1. Given the extensive regulatory reporting and some overlapping data requisitions, it is vital to re-evaluate the daily data needs of supervisors. Streamlining reporting and standardizing processes can bolster data checks. Data's timeliness, accuracy, and precision are crucial competitive factors. A standout feature of the BDR is granularity, underscoring the importance of swift decision-making based on dependable data. For the implementation of new regulations, it's essential to have a comprehensive understanding of the regulation, take full advantage of consultation periods, and gauge the magnitude of the change. This involves assessing IT programming requirements and prioritizing certain activities based on dependencies and parallel execution possibilities, such as data processes and control frameworks. 

Former Secretary General of BCBS Insights 

Expanding on the Basel III topic, Bill Coen provided thoughtful insights drawn from his Basel Committee career, where he played a pivotal role in finalising Basel III, which included having responsibility for finalising the Basel framework reforms that were published in 2017 and the Fundamental Review of the Trading Book, which was finalised in 2019. Coen highlighted that the Basel Committee's mandate goes beyond regulatory measures such as capital and covers other dimensions that are arguably even more impactful such as strong risk management, effective banking supervision, proper corporate governance, and risk aggregation and risk reporting (BCBS 239).  

Reflecting on his journey, he emphasised the importance of regulatory sandboxes and careful industry-regulator engagement. He cited the South African Reserve Bank's proactive shift in data management as a testament to the need for prompt action, clear timelines, specific milestones and well-articulated deliverables. On the innovation front, he stressed that the SVB incident stands as a testament to technology's transformative impact on the financial sector. Banks must avoid reactive, slow responses to the changing competitive landscape that continues to be heavily influenced by technological innovation. In a competitive global landscape, banks must be agile and nimble to thrive.