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How to prepare for Basel III

By: Sageworks

Following the recent financial crisis, the Basel Committee of Banking Supervision (BCBS) set out to “strengthen global capital and liquidity rules with the goal of promoting a more resilient banking sector.” With the release of Basel III, the Committee is building on Basel II’s three pillars and strengthening them. The three pillars include maintaining minimum capital requirements, a supervisory review process and market discipline.

According to the BCBS’s Basel III framework document published in December 2010 and revised in June 2011, the main objective is to improve banks’ “ability to absorb shocks arising from financial and economic stress.” The framework also states that a major contributor to the financial crisis was that many banking sectors had built up “excessive on- and off-balance sheet leverage” which was accompanied by a “gradual erosion of the level and quality of the capital base.” Basel III seeks to address these shortcomings and hopefully prevent a future crisis.

To help banks understand the requirements and associated impacts, Sageworks partnered with Crowe Horwath to lead an informative webinar on preparing for Basel III. The webinar was led by Dave Keever, principal at Crowe Horwath, and Jack Gregory, executive consultant at Crowe Horwath, and was the final webinar in a three-part series. Prior topics included ALLL model validation and taking a roadmap approach to preparing for the future of the ALLL.

After providing an overview of Basel, Keever and Gregory addressed some of the key changes within the Basel III framework:

Capital adequacy – Includes changes to the quality and level of capital, and the introduction of additional capital buffers.
• Leverage ratio – Includes off-balance sheet exposures and will serve as a “backstop to the risk-based capital requirement,” but could lead to reduced lending.
• Liquidity Coverage Ratio – Will require banks to have “sufficient high-quality liquid assets to withstand a 30-day stressed funding scenario.”
• Net Stable Funding Ratio – Encourages long-term resilience by creating incentives for banks to fund their activities with more stable sources.
• Strengthened Risk Capture – Includes more centralized and accurate data management, and more in-depth stress testing and forecasting.

Keever and Gregory also covered the differences and implications for banks under $15 billion in assets, and addressed the Basel III phase-in arrangements. The arrangements, as shown below, are designed to provide banks with the opportunity to gradually meet the new requirements. Some requirements, like a 4.5% minimum tier 1 capital ratio and a 3.5% minimum common equity capital ratio, took effect on January 1, 2013. But other components will take effect later. For example, the capital conservation buffer doesn’t begin to be enforced until January 1, 2016 and starts at 0.0625%. Over the next few years, the percentage gradually increases to 2.5%, effective January 1, 2019. It is also important to note that disclosure starts January 1, 2015, which is also considered the compliance deadline for community banks.

Basel III Phase-In Arrangements

Listen to a copy of the recorded webinar: Preparing for Basel III.

About the Author

Sageworks

Raleigh, N.C.-based Sageworks, a leading provider of lending, credit risk, and portfolio risk software that enables banks and credit unions to efficiently grow and improve the borrower experience, was founded in 1998. Using its platform, Sageworks analyzed over 11.5 million loans, aggregated the corresponding loan data, and created the largest real-time database of private-company financial information in the United States. The company was acquired in 2018 and is now part of Abrigo.

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Abrigo is a leading technology provider of compliance, credit risk, and lending solutions that community financial institutions use to manage risk and drive growth. Our software automates key processes — from anti-money laundering to fraud detection to lending solutions — empowering our customers by addressing their Enterprise Risk Management needs.

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