European Basel III implementation - CRD IV

The European Commission has created a new Capital Requirements Directive (CRD IV), via a parliamentary ruling in July 2011. It incorporates Basel III standards into European law in order to create a single approach to regulation and supervision within the European banking sector. Bank for International Settlements (BIS) provides global standards through Basel initiatives, then regulatory governance is adopted by the different global regulatory bodies.

The directive aims to:

  • provide enhanced governance with broader and stricter risk management measures
  • define an enhanced supervisory regime with appropriate powers of sanction to cope with the new scope across a common global framework
  • reduce reliance on external ratings that force reliance on internal credit opinion.

Challenges for banks

Before the crisis, banks were able to grow almost without thought to capital and liquidity levels, but these are now critical to decisions around growth. Business (particularly product mix) must be balanced between profitability and the effects to these measures.

  • Previous lucrative areas such as derivatives will now need additional capital.
  • Leverage monitoring becomes essential – limits for individual assets need to be allocated and respected.
  • Long and short term cash flow management will need to be introduced to preserve liquidity ratios.
  • Internal credit analysis becomes increasingly important and will require integration into the regulatory process.

The upshot is that investment firms will need to overhaul their corporate governance and control framework.

What should banks be doing now ?

To move towards building a harmonised single view of data we believe that Banks need to consider:

  • Making near real time reporting of all regulatory measures a business goal;
  • Adopting new approaches that allow for incremental delivery;
  • Combining historically separate views of Risk, Finance and Treasury into a single view of the data;
  • Establishing system data ownership and accountability to facilitate improved data quality;
  • Building solutions for the reporting and analysis of intra-day liquidity positions;
  • Enhancing governance and policy around liquidity and capital related data to ensure full traceability and auditability.

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