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Data Governance Work Will Help Banks Prepare for Basel III

Poor data quality could lead to costly higher capital requirements, Ernst & Young principals say.

How much should U.S. banks and their IT departments be doing now to comply with the Basel III rules that phase in higher capital requirements for banks between 2013 and 2018? It depends whom you ask. In a Reuters article yesterday, Deutsche Bank's chief executive Josef Ackermann warned banks not to embark on a "dangerous race" to fulfill new bank capital rules early, which he said would restrict their ability to lend and thus stimulate the economy. In an interview yesterday, Ernst & Young financial services principals Dan Higgins and Adam Girling agreed that for some aspects of Basel III's raised capital guidelines, like changing capital calculation methods, there's little advantage for banks to getting out in front of the crowd.

But for some IT implications of the new rules, particularly those around gathering and reporting data, it would behoove banks to start preparing and acting early, the analysts say.

"The increased capital requirements place a renewed priority on the quality of underlying data, because poor data quality will lead to more conservative regulatory capital calculations, which will be costly," Girling says.

From a technology perspective, there's a danger of taking too much of a wait-and-see approach, Higgins says. Rules requiring new risk and capital reporting will require banks to set up stricter data governance practices. "That's about setting up the right governance organization and empowering business users and owners of the data to have an authoritative voice in change management and control," Higgins says. "It's about defining a set of measurements and metrics to monitor data quality over time and have a feedback loop and a process to do continuous quality improvement." Banks will need to gather, aggregate and align data across different books from different siloed functions within organizations, he says, using common taxonomies and definitions so they can have confidence in their regulatory reporting. "Some smart work early on doesn't necessarily mean you're racing to compliance, but preparing yourself," Higgins says.

The counterparty credit risk reforms in the Basel III framework will require multi-year infrastructure builds at banks, Girling notes, that they may want to start soon. To better gauge counterparty credit risk, existing systems will need to be reworked to improve data reporting and daily risk calculations. But banks won't necessarily have to buy new reporting and analytics tools, Higgins believes. "Most of the large institutions have a plethora of analytic tools, more than they probably need," he says. "This will be more about data sourcing and possibly some enhancements to calculation engines and collateral management software." Banks will need to come up with global counterparty definitions, a goal that has long been elusive and challenging, Higgins says.

Girling points out that the Dodd-Frank OTC reforms and new rules about counterparty risk reporting will need to be considered in conjunction with the Basel III requirements, in particular around changes to collateral management systems.

Many U.S. banks have already begun factoring Basel III into their capital planning, Girling says, as far as what's known about the rules will permit them to do so. Many banks have already done impact analyses against the draft proposals, he says. "People haven't launched full-scale implementation of Basel III, but it's never too early to get ahead of planning for the substantial infrastructure builds here," he says.

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