Basel III implications for the business have been grouped under three main headings:
• Trading book risk
• The introduction of a global liquidity risk standard, and
• The requirements of the capital base
Trading book risk basically covers enhanced counterparty credit risk requirements, such as stressed parameters for market and counterparty credit risk, credit valuation adjustment (CVA) and wrong way risk. The global liquidity risk standard focuses on new liquidity ratios and additional monitoring metrics, such as the concentration of funding; and the aim of the new capital base requirements is to increase the quality, quantity and international standardization of the capital base.
Each of these areas raise different challenges from a business perspective. In terms of the technology needed to insure compliance, however, while there are differences between the three, there are also similarities in terms of the data management, calculations, advanced analytics and reporting requirements.
A greater range and volume of data is needed to meet new requirements relating to market, liquidity and counterparty credit risk. This means being able to access different sources, and carry out multiple data quality checks and reconciliation tasks. A reliable reconciliations application is needed to support data quality processes.
Furthermore, banks need to make significant changes to their risk data model to ensure that they are in line with the new rules; appropriate enterprise risk technology architecture must be in place, capable of aligning risk and finance. Flexibility is required to cover analytics requirements - a regulatory capital calculator able to support a seamless migration between the various Basel regimes, for example, together with advanced stress testing functionality that can operate across risk types. And transparency cannot be ignored, whether it is a question of displaying data for the regulator or for internal purposes.
Finally, at Board level, an overview of the different business units is required, allowing Board members to view and manage risk collectively.