In The News
Basel III is coming January 1, 2013
Location: New York Date: June 1, 2012
While the details of the regulatory requirements for Basel III have yet to be published by any national supervisor, the essence of Basel III changes is well known. The list of items is significant:
- Tightening of capital criteria; additional capital required for the conservation buffer; phase in / out of adjustments to capital; for SIFI banks and other institutions, yet more capital requirements; the potential for countercyclical additional capital; and a leverage ratio (new to banks outside of the US)
- New liquidity measures
- Changes to the Market Risk calculation
- Counterparty Credit Risk rule changes
- Increased Correlation (R) for large financial institutions
- Securitization rule changes
- Some minor rule changes affecting such things as central counterparties
AxiomSL is prepared now to help your bank get ready for these changes.
Perhaps the most radical changes will be in the capital rules. While some of these would not require any changes in reporting, per se, tracking and flagging changes in capital would be an ongoing requirement. Banks will be required to take steps to account for:
- Framework change – Capital will be designated as:
- Common Equity Tier 1
- Additional Tier 1 Capital
- Tier 2 – gone concern, i.e. instruments that aid a firm in resolution
- Controls around how much minority interest capital can be included
- Phase out of certain capital instruments allowed in Basel II
- Phase in of certain deductions not previously captured in the Basel I & II rules
- Immediate removal of some asset deductions from capital and replaced with simple 1250% risk weighting
- Phase in of capital conservation buffer
- For banks and other institutions that are designated as SIFI (Systemically Important Financial Institution), phase in additional capital by rule
- Potentially, phase in of countercyclical capital buffers
- The addition of a Leverage ratio for banks outside of the United States
AxiomSL can help you prepare the necessary controls, aggregations, new parameters, and calculations that will be needed to implement these changes.
There is considerable resistance, especially from the US Federal Reserve, to the BIS proposed liquidity measures - LCR (Liquidity Coverage Ratio) and the NSFR (Net Stable Funding Ratio). However, the need for some such requirement is recognized by all.
AxiomSL has tools available to assemble the components of both the assets and liabilities involved in liquidity management. Working with your Treasury department, Axiom SL can have you prepared to adopt any scenario that the supervisors require.
While much of the world has already adopted so-called Basel 2.5 market risk rules, the US has yet to implement such enhancements as “stressed VaR”, “incremental risk”, in its yet to be released FFIEC 102.
AxiomSL familiarity with the the FFIEC 101 will allow us to partner with your Risk Management team to track what period is required to establish the stressed VaR add-on. In addition, concentration, new specific risk add-ons, and correlation trading modules can be developed in advance of the publication of US rules.
Counterparty Credit Risk
Basel III has some significant changes to the counterparty rules prevailing in Basel I and II. A CVA (credit valuation adjustment) will be required, concentration charges will come into play, and wrong way risk has to be identified and mitigated.
AxiomSL has tested the standardized CVA formula, is conversant with the Credit Derivative indices, and can help you be ready for the changes come January 1, 2013.
Much of the rest of Basel III will require minor changes in some formulas and mapping for such items as re-securitizations and increased margin period at risk.
AxiomSL is fully conversant with the proposed changes and can suggest where you can pre-position your databases or feeds to be ready for compliance.
For additional information or to speak to one of our Subject Matter Experts please click on the Contact section of our website. Simply complete the form and click the submit button and we’ll get back to you to answer any questions you may have.
About Axiom Software Laboratories, Inc.
AxiomSL is a leader in software solutions for enterprise Risk Management, Data Management, Regulatory Reporting and Compliance. AxiomSL's proven technological platform solves the highly complex data, risk and financial management challenges faced by the world's leading financial institutions. AxiomSL's products help clients deal with the dynamics of business and technology changes, adapting to different data and technical environments, allowing mission critical activities to be performed across the entire enterprise. AxiomSL's professionals cover a range of disciplines, including risk management, database and middleware technology, financial control and regulatory reporting.
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