Basel III Liquidity Changes Are Testing Banks’ Compliance Technology

By Ed Royan, COO, EMEA, AxiomSL

The way in which banks manage their liquidity is undergoing major changes as a result of new regulations. The Basel lll reforms have introduced a series of complex metrics that banks must use to assess the availability of liquid assets. As they get to grips with these new requirements, many are coming to realize the important roles that both subject matter experts (SMEs) and technology have to play in compliance.

Basel lll uses two key calculations to look at banks’ liquidity in both the short- and long-term. The Liquidity Coverage Ratio (LCR) is intended to assess whether a bank has enough liquid assets to withstand a 30-day period of stress. The Net Stable Funding Ratio (NSFR) focuses on whether a bank has sufficient funding over a year-long period. In the European Union (EU), banks must also report Additional Liquidity Monitoring Metrics (ALMM), which are designed to analyze the maturity distribution of their cash flows and the concentration of their funding by product and counterparty type.

The first challenge that banks face when adopting these metrics is one of regulatory analysis. There are variations in the ways the requirements have been incorporated into law in individual regions and countries. As a result, banks must understand the different rules that apply for their group-level reporting and for reporting in each of the jurisdictions in which they operate.

It is not enough for a bank’s subject matter experts, or SMEs, to understand the requirements. In order to implement them within the bank’s operations, the SMEs must also be familiar with the technology the bank will use to run the calculations and report the results to the regulators.

Many banks are coming to the conclusion that the most efficient way to tackle the Basel lll liquidity requirements is by working with a vendor that can provide both SME knowledge and the technology needed to run the LCR, NSFR and ALMM. Vendors that have worked on Basel lll liquidity projects for clients in a number of countries bring with them valuable knowledge about the requirements in those jurisdictions.

Once the requirements have been analyzed, banks face a major challenge to source and bring together all of the necessary data. In order to get an accurate picture of their liquidity, banks need data from all of their different business lines, including retail, commercial and investment banking. Unfortunately, there are usually many differences in the ways individual business lines manage their data, which means the data cannot automatically be pooled together.

The best way for banks to overcome this obstacle is by implementing a platform that sits across the different business lines and systems they use. The platform should aggregate all of the necessary data and harmonize it by subjecting it to a common set of controls and validation checks. The data will then be ready to use.

In total, many hundreds of data items are needed to run the different liquidity ratios mandated by Basel lll. If approached manually, the process of aggregating all of this data, harmonizing and validating it, and then running the ratios and producing the mandatory reports, can take several weeks. However, since the requirements were first introduced in Europe, regulators have dramatically increased the frequency with which banks must report on their liquidity—in some cases requiring daily reporting. In order to keep up, banks not only need to automate their compliance with the requirements; they also need to ensure they use high-performance technology that can process large volumes of data quickly.

A final challenge presented by the Basel lll liquidity regime is managing the changes that are made to both the calculations and the way the results are reported. For example, in 2016, banks in the EU will need to start using a new EU-specific template to report the results of the LCR. Banks will require a large number of resources if they attempt to monitor and implement changes like these themselves. However, they can greatly reduce the pressure on themselves by working with a vendor that will supply them with the most up-to-date calculations and report templates.

The roll-out of the Basel lll liquidity regime is proving to be a major test for banks’ regulatory compliance technology. However, by focusing on equipping themselves with the right functionality, they can easily adapt to the changes that are being introduced.