Stress; it affects us all, and as we’ve seen over the past few years, the financial world is no different. Luckily for European financial institutions, help is at hand in the form of the regulators very own stress reliever: Basel III. Designed to enhance the loss-absorbing capacity and thus resilience to crisis situations, the big brother of Basel’s I and II is a regulatory game changer and the cornerstone of the industry’s attempt to control risk.
True to trilogy form, Basel III raises the stakes on its early models boasting a comprehensive set of reform measures, developed by the Basel Committee on Banking Supervision, to strengthen the regulation, supervision and risk management of the banking sector. This move has sparked calls from Germany and France to water down some important elements of the Basel III guidelines on capital requirements in order to mitigate any “negative effect” on growth.
However, Basel III exists because Basel II fundamentally didn’t work. By allowing financial institutions to create their own sophisticated risk weighted models it hands the initiative back to the institutions, allowing them to justify their own risk weightings.
The question then becomes how firms can justify the lowest capital holdings possible. And the answer? By having the upmost confidence in the data they are using to base their decision on as risk infrastructure and calculations are nothing without the data that feeds them. In other words, banks will need to demonstrate how and why they have arrived at their risk weightings and the only way to do this is through their data.
So when it comes to Basel III compliance if you are going to set your own risk model;
- Your data had better be accurate
- You had better be able to prove it
- And, you had better be able to prove the validity of data’s source
These are commandments of Basel III; stick to them, and you’ll quickly see your stress related stress vanish.