Are US Banks ready for Basel III?

Final rules for capital adequacy will be a big challenge for banks that aren't prepared

By Tom Kimner, Head of the Americas Risk Practice, SAS

You only have to look at a few of the key requirements in the newly approved final rules for capital adequacy (Basel III) to see the increased complexity you’ll be facing. Will your current technology support the computation, integration, aggregation and reporting that you’ll need for regulatory capital compliance?

In addition to the newly-introduced US leverage ratio for all banks, advanced approach financial institutions will now be subject to a more stringent supplementary capital leverage ratio. Starting January 1, 2014, FDIC-supervised institutions – including national banks, state banks, bank holding companies (BHCs) – with total assets of more than $500 million, and subsidiaries of foreign banks, began the compliance transition period with revised definitions including Available Capital, Credit and Market Risk RWA Calculations and Leverage Ratios.

Three things you need

First – You need an integrated risk management platform that can incorporate all market risk and credit risk rules and perform exposure calculations across all on- and off- balance sheets activities. The system you choose should be flexible enough to adopt new rules and calculation standards and components.

Second – It is crucial that you have enhanced risk computing and aggregation capabilities. The regulatory rules require an institution’s risk management procedures to include the use of stress testing and scenario analysis, which need to be performed consistently across all portfolios. Also, stress testing must be able to demonstrate how economic cycles, especially downturns, impact risk-based capital requirements across multiple future time horizons throughout the entire life of each exposure.

Third – You need to develop a forward-looking risk monitoring system. This will not only serve as an ongoing monitoring and reporting system for current and estimated future leverage ratios, but it will also serve as an interactive platform to diagnose and evaluate the continuing effectiveness of hedges and other loss mitigation strategies.

New technologies that can help

SAS’ high-performance risk solution is ideal for the intensive computations necessitated by internal model-based exposure and CVA capital charge calculations. This solution will help establish an ongoing monitoring system for risk exposures and capital ratios and allow banks to integrate those measures into their capital planning and CCAR process.

Improved credit exposure management and capital use. And lower operating costs.


room full of servers

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Make capital management – that is, forward-looking planning and short to midterm use – more efficient and more oriented to risk-adjusted performance measures.

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