Impact of Basel III to Banks IT
Basel II regulation focused on the consolidation and measurement of risk. Financial organizations built IT systems that gathered ‘exposure’ information, analyzed it and calculated the measures required by the Basel accord. Basel III addresses two areas of regulation – solvency and liquidity – thereby ensuring that banks have sufficient capital to return deposits in the event of a crisis, are able to survive a protracted liquidity freeze, and are less dependent on the vagaries of short-term credit markets. With capital ratios agreed and the liquidity ‘framework’ entering an observation period, banks now need to assess the impact Basel III will have on their existing IT infrastructure and review the technology investment which is needed to be compliant.
The technological impact of the ‘solvency’ element of Basel III can be rated as medium. For example, the changes in capital levels won’t entail significant change to the existing IT systems, nor will the changes in capital reporting, especially if banks are compliant with Basel II. The changes in Risk-Weighted-Asset calculation – where most of the Basel II IT money was spent – will mostly involve incremental changes to models and data, plus possibly the building of systems for specific exposures that weren’t considered before, or where new regulations will change their treatment dramatically. For example, the CVA calculation (Credit Value Adjustment), which implies a capital charge for the deterioration of asset quality (e.g. rating downgrading) as opposed to straightforward counterpart default risk.
