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Published: August 20, 2024
It comes as no surprise to anyone that the future of financial regulation is going to look a lot different than what it currently looks like today. With a host of regulatory enhancements in flight and on the horizon, it’s important to ensure that firms are prepared and well versed on what’s to come and their obligations.
Financial Regulation is a hot topic across the industry at the moment with up-coming changes such as the Basel 3.1 upgrade, ear marked for July 2025.
Basel 3.1 is the latest in a series of regulatory frameworks designed to enhance financial stability following the 2008 financial crisis. Building on Basel I, II, and III, Basel 3.1 introduces significant changes aimed at further strengthening the global banking system.
Basel 3.1 main objective is to reduce lack of consistency in Risk-Weighted Assests (RWA) calculations.
In addition to reducing the use of internal risk models, Basel 3.1 is fundamentally improving risk sensitivity of the new Standardised Approach (SA) across the board.
Select each theme to view the fields:
A new framework to replace the existing calculation methodologies and improve the risk sensitivity of market risk capital requirements.
Clear distinction trading book or non-trading book allocations.
Aim to improve transparency in risk reporting via upgraded disclosure requirements.
Credit Risk Reform through various changes and upgrades with the focus of reducing variation in credit risk weights across firms for a more harmonised approach. This will include better recognition of CVA hedges and a closer alignment with industry CVA practices for accounting purposes;
The aim is to make the SA more risk sensitive with more detailed requirements for different counterparties.
Due diligence frameworks need to be more comprehensive in order accurately reflect creditworthiness of Counterparty.
Introduction of a new Standardised Approach (SA) for calculating Operational Risk Capital (ORC) across all firm thus replacing all existing approaches for calculating Pillar 1 Operational Risk Requirements.
The new causation will encompass the below:
This will be the link between internal risk models and then new standardised approach. The proposal is to gradually phase in a capital floor of no lower than 72.5% of overall exposure, reaching this percentage by Q1 2030.
Most US banking institutions that operate internationally and have significant global exposure, will be impacted.
Both jurisdictions will be impacted similarly. Global exposure and capital thresholds will be the main driver. The EBA (European Banking Authority) have defined the capital threshold as anything exceeding EUR 3 Billion for Their 1 banks.
Although the impact on the APAC market is not seen as severe as other jurisdictions, Trading Book Reviews, changes to CVA, Credit and Operational Risk are still required. The diverging timelines across all Asian regions makes this more difficult.
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Conduct a gap analysis to identify areas needing improvement.
Upgrade risk management frameworks to align with new methodologies.
Implement necessary technological upgrades for data management and reporting.
Train staff on new regulatory requirements and methodologies.
According to industry experts, the successful implementation of Basel 3.1 requires a comprehensive approach that integrates risk management, technology, and regulatory compliance. Firms should engage with consultants and regulatory bodies to ensure a smooth transition.
First Derivative have a wealth of experience in providing risk assessments to determine where a first requires enhancements and improvements to meet the new regulatory obligations. From an initial impact analysis through to implementation and liaising directly to the regulator, First Derivative can help.
Focus needs to be given to building out a robust control framework, ensuring a high level of quality control and accuracy. Our business analysts are well versed in all aspects of controls, both internal and external. We can work with large volumes of data to determine any key issues or gaps in processes and provide a plan to get you to where you need to be.
Regulators want to see transparent and concise data lineage flows via reporting platforms. Manual processes and legacy systems need upgraded. First Derivative has a long track record of providing precise and systemic expertise to a wide range of firms. Our consultants are well versed in full system migrations and platform upgrades.
Our highly skilled consultants at First Derivative can help you with regulation interpretation, implementation and support you with overcoming your regulatory obstacles. We provide extensive expertise in many areas such as PM, PMO, BA and QA and would endeavor to lighten your load and help you on the road to success. First Derivative is ready and waiting for your call.
Annie Fletcher
Managing Consultant
First Derivative
First Derivative LinkedIn profile
9 years experience within the Regulation and Compliance space. Working across multiple regimes to provide insight into regulatory obligation requirements for Tier 1 Banks. Focusing mainly on control implementation and firm enhancements.
Delivers capital markets expertise and comprehensive support to our clients with a focus on regulatory-driven change and remediation programmes.
Provides capital markets and programme management expertise to our industry-leading clients within Regulatory Change and Remediation.
