Basel III Handbook

Banks and other financial institutions are under pressure to understand and implement recent Basel III amendments, which are designed to improve their ability to absorb shocks arising from financial and economic stress. These amendments are based on lessons learned during the 2008 financial crisis.

Accenture offers an in-depth exploration of the Basel III amendments focused on strengthening global capital and liquidity rules with the purpose of helping clients better understand the possible implications, and the avenues available to them. Accenture believes organizations can respond to these requirements in a way that goes beyond compliance to help advance the drive to achieve high performance.

Recent fiscal crises have demonstrated numerous weaknesses in the global regulatory framework and in banks’ risk management practices. In response, regulatory authorities have considered various measures to increase the stability of the financial markets and prevent future negative impact on the economy. One major focus is on strengthening global capital and liquidity rules.

Basel III aims to address this issue by improving the banking sector’s ability to absorb shocks arising from financial and economic stress. In December 2010 the Basel Committee on Banking Supervision published Basel III: A global regulatory framework for more resilient banks and banking systems (a revised version was published in June 2011) and Basel III: International framework for liquidity risk measurement, standards and monitoring.

The Basel III reform package aims to improve risk management and governance as well as strengthen banks’ transparency and disclosure. Basel III is also designed to strengthen the resolution of systemically significant cross-border banks. It covers primarily the following aspects:

• Definition of capital. Introduction of a new definition of capital to increase the quality, consistency and transparency of the capital base. Further, the reform package removes the existing inconsistency in the definition of capital by harmonizing deductions of capital and by increasing transparency through disclosure requirements.

• Enhanced risk coverage/ Counterparty Credit Risk. Basel III builds on Basel II and the European Capital Requirements Directive III (CRD III) with several new reforms.

• Leverage ratio. A leverage ratio now supplements Basel II’s risk-based framework.

• Reduced procyclicity and enhanced countercyclical buffers. The main objectives of these measures are to dampen any excess cyclicality of the minimum capital requirement; promote more forward-looking provisions; conserve capital to build buffers at individual banks and in the banking sector that can be used in periods of stress testing; achieve the broader macro-prudential goal of protecting the banking sector from periods of excess credit growth.

• Global liquidity standard. A new liquidity standard to promote short-term resilience of a bank’s liquidity risk profile, and to promote resilience over the longer term.

Key aspects of Basel III are a stricter definition of capital to increase the quality, consistency and transparency of the capital base; introduction of capital buffers; increased capital requirements for counterparty credit risk; introduction of a leverage ratio to supplement the risk-based framework of Basel II; and a new global liquidity standard introducing two new ratios which banks need to fulfill. Also included are increased requirements for systemically important financial institutions and strengthening corporate governance.

Even though some of the requirements are still under discussion and need to be specified (and others might be recalibrated based on the quantitative impact analysis, banks at this time clearly must deal with wide-ranging regulatory changes that will impact their business models and funding strategies as well as capital and liquidity costs. At the same time, pressure continues to mount from a market expecting banks to fulfill or even exceed the new requirements before the regulatory deadline.

Michael Auer is executive principal in Accenture Risk Management, Munich, responsible for German-speaking markets. He has 18 years of industry and consulting experience in financial services and risk management across Europe working with global institutions to transform their business and risk capabilities. His extensive experience in risk management (mainly in the areas of market, credit and operational risk, risk and regulatory matters and operating models) helps multinational financial institutions become high-performance businesses.

Georg von Pfoestl is a senior manager in Accenture Risk Management. Based in Vienna, he has eight years of experience in the area of risk management with a focus on credit and liquidity risk, regulatory matters and risk-weighted assets optimization. With his experience as a banking inspector at the Austrian National Bank, his pragmatic knowledge from working with regional and international financial institutions across German-speaking markets and his technical skills pertaining to Basel II and Basel III regulatory requirements, he guides financial firms on their journey to high performance.