Five myths and misconceptions community banks have about Basel III
Risk Research and Quantitative Solutions
If you find the combination of Dodd‐Frank and Basel III confusing, you’re not alone. Let’s explore some of the more common misunderstandings around the US Basel III final rule and share SAS’ perspective on them.
- Basel II didn't pertain to us, so Basel III won’t either.
The US Basel III Final Rule provides capital frameworks commensurate with bank size, and as a result, the rules apply to nearly all banks in the US.
- Basel III is only for “systemically important" financial institutions.
The Basel Accord and its subsequent revisions were designed for the majority of financial institutions across the globe, not just the Systemically Important Financial Institutions (SIFIs).
- We're under the $10B asset mark; Basel III doesn’t apply.
The new US Basel III requirements, in fact, apply to US banks with asset sizes of greater than $500 million. To comply with minimum regulatory capital ratios, these smaller banks must apply the Standardized Approach for calculating risk-weighted assets (RWAs) and begin adapting to the revised definitions of regulatory capital and to the regulatory capital adjustments and deductions in accordance with the transition provisions in the U.S rules.
- Once we get our enterprise risk management (ERM) program up and running, we might be able to start thinking about Basel III.
Make no mistake – Basel III is a vital part of an ERM program. The subjective approaches to risk assessments, controls and control effectiveness for Sarbanes‐Oxley (SOX) requirements do not calculate risk exposures. So for banks, not being able to calculate risk exposures means that there are no sufficient methods to calculate risk capital.
- Our regulators will be looking for our governance, risk and compliance efforts, not Basel III.
One of the problems with SOX‐like approaches is that control and business environment factors get lumped in with pure risks. Regulators are now looking for qualitative risk management from compliance and audit departments and quantitative risk management (risk capital calculations) from ERM.
What to do
As of January 1, 2015, community banks are required to comply with the US Basel III minimum regulatory capital ratios as well as Basel’s Standardized Approach for calculating risk‐weighted assets. They are also required to start adapting to the revised definitions of regulatory capital and to the regulatory capital adjustments and deductions in accordance with the transition provisions in the U.S. rules.
Basel III isn’t going away. An investment now, rather than later, in a tool that gives you repeatable processes – and that updates automatically when the rules change – will be well worth the time and effort. It will not only help you address the complexities of mandatory Basel III compliance, but also reduce staffing expenses in the future.
Read the entire white paper, “Does Basel III Apply to the Community Bank?” to learn how this regulation applies to your organization and what you can do to ensure compliance.