bank regulation deadline

More than a quarter of institutions reporting delays or assuming a later deadline, according to EY survey.

Global banks have made mixed progress in meeting deadlines to implement the revised Basel III framework, according to two recent surveys, suggesting some institutions may struggle to be ready on time. 

Last year, the Basel Committee on Banking Supervision delayed the bulk of the remaining implementation deadlines to implement the revised Basel III framework by one year to January 1, 2023 because of the  disruption caused by the Covid-19 pandemic. 

In a report, EY said two-thirds of banks are highly confident of being compliant in less than two years while 20% are reporting delays and 7% are assuming a later deadline. 

“The current levels of confidence expressed by banks in meeting the deadlines needs to be seen in the context of an overall timeline that still feels distant,” said Dan Cooper, EY’s UK banking and capital markets leader, adding that it will be interesting to see if that optimism is justified. The consultancy polled 45 firms amongst the top 100 banks, headquartered in 19 countries. 

Meanwhile, Bloomberg surveyed more than 100 senior risk and trading professionals exclusively on their preparedness for the Fundamental Review of the Trading Book (FRTB) and found banks to be split evenly between those believing they would be ready on time and those needing to catch up. 

FRTB regulates bank wholesale trading activities and is widely considered by bankers to be the toughest part of the Basel III framework to implement. EY’s respondents flagged data quality and availability as the top challenge in fulfilling the reforms. The delivery of a risk-weighted assets control framework ranks much higher as a challenge this year, EY said. For FRTB, Bloomberg’s polling found that 59% of respondents also highlighted data as their biggest headache. 

Costly exercise

EY said banks are typically spending around the same again on FRTB implementation as on the rest of the Basel reforms. Its research highlighted that eight banks are spending more than $50m each on FRTB and of those, two are spending over $200m. 

EY said the biggest spenders were global systemically important banks (G-SIBs) as they tend to have the largest trading books and are committing about $100m each on average. Domestic systemically important banks (D-SIBs) are typically spending $20m-30m each as they usually have smaller trading books. Much of that expense covers infrastructure and data systems. 

[the Fundamental Review of the Trading Book] presents all of the major data challenges banks face in a nutshell

Brad Foster, Bloomberg

“FRTB presents all of the major data challenges banks face in a nutshell, from cleaning the data to categorising it and ultimately making it applicable for risk management and regulatory compliance,” said Brad Foster, head of enterprise content at Bloomberg. 

 “The upcoming implementation of this major new rule should be a reminder for banks to evaluate their overall data strategy and make sure their data aligns across the front, middle, and back office, from the trading desk to the compliance department.”

The Bloomberg poll revealed FRTB difficulties relating to data and risk modelling requirements. These include cleaning data, obtaining historical data such as volatility and curves, data bucketing, and capturing real price observations for the internal models approach (IMA) and aligning market risk and front-office pricing models across the institution. There is also considerable debate among a third of respondents over whether to use the standardised approach (SA) or the IMA. 

 Meanwhile, Bloomberg found that pushing the deadline back saw 57% of respondents slow their implementation program, with 47% saying implementation has “slowed somewhat” and 10% saying implementation has “slowed significantly.” Only 2% of respondents have accelerated implementation, and 41% reported no change of pace.

With the first FRTB reporting requirements coming into force from the third quarter of 2021, there was a similar split in how institutions are reporting on their preparations. 

Exactly half of respondents estimated that they were on target, barring minor challenges, to begin reporting later this year, and 3% said they had finalised their solution and had no open issues. However, the remaining 47% saw challenges ahead. Some 25% anticipated challenges implementing analytical system and risk sensitivity calculations, and 22% anticipated challenges in data bucketing and the treatment of funds.

Output floor hit

In terms of other impacts from implementing the remainder of Basel III, EY found that 60% of banks will see a reduction in their common equity Tier 1 (CET1) ratio due to  the standardised or output floor. The Basel Committee introduced a floor to restrict the use of bank internal models by imposing a 72.5% floor on how far their outputs can diverge from those of the SA, which is scheduled to be in full force by 2028.

For 64% of G-SIBs the reduction in CET1 will be more than 50 basis points, according to respondents. However, 19% of banks are still unsure of how the floor will impact them. 

Looking at capital impact disclosures, a third of respondents are unsure if they will make any public statements on that area in the next year, down on more than half who said they would in EY’s previous survey in the fourth quarter of 2019. Nonetheless, 46% of G-SIBs have disclosed their numbers, compared with only 6% of D-SIBs. EY found that 49% of D-SIBs are not planning to disclose this year, compared with 18% of G-SIBs. 

Jared Chebib, EY’s Basel III reforms UK consulting lead, said there will be increasing market pressure on banks to disclose these numbers as the deadline approaches given that some of the capital impacts are likely to be significant. “Just as important will be banks’ ability to explain what mitigating measures they will use, in an environment where efficient use of capital is critical,” he said.

This article first appeared in The Banker’s sister publication Global Risk Regulator.


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