Fenergo is a global provider of digital solutions for client lifecycle management (CLM) and digital transformation for financial institutions.
Its software digitally transforms and streamlines end-to-end CLM processes – from regulatory onboarding, data integration, client and counterparty data management, client lifecycle reviews, and remediation, all the way to client offboarding.
Crowdfund Insider recently caught up with Tracy Moore, Director of Thought Leadership and Regulatory Affairs at Fenergo, to discuss the impending changes that Basel III may bring forward. Big US banks see Basel III as punitive rules that will increase the cost of banking for everyone. At recent hearings in Congress, bank executives unanimously expressed their concerns that these rules are negative for the US banking industry.
Our conversation with Tracy Moore is shared below.
Crowdfund Insider: Could you give us a brief overview of Basel III and what the key objectives are?
Tracy Moore: Basel III Endgame is a global agreement set forward by the Basel Committee on Banking Supervision in response to the widespread financial crisis experienced in 2007.
The agreed-upon measures are designed to bolster the resilience of the US banking systems and will largely impact the regulatory capital frameworks for banks with assets exceeding $100 billion, encompassing approximately 36 banks. Basel III is a comprehensive process; its global three-year phase-in period is scheduled to commence in January 2025.
This means that US banks may encounter more stringent capital requirements, potentially affecting their capacity to engage in certain capital markets activities, such as proprietary trading. Also, the impact extends beyond large banks, as smaller banks with substantial trading operations will also fall under the purview of the new risk framework. As such, financial institutions will need to revamp their protocols, emphasizing the significance of adopting digital and streamlined solutions to support meeting regulatory requirements.
Crowdfund Insider: How do you anticipate Basel III will impact banks and broader capital market implications?
Tracy Moore: Basel III is poised to reshape banks’ operations and strategies. With stricter capital requirements, we may see that banks tighten the belt on their lending structures or increase interest rates – effects which will impact both businesses and consumers. Market liquidity and risk management is another area that we will see an impact as a result of the rule; Basel III looks to ensure that banks maintain sufficient liquidity cushions to withstand short-term and long-term liquidity stress events.
These changes will naturally bring new challenges for banks.
To navigate these unfamiliar waters effectively, banks will need to be vigilant and have a good grasp at what is being asked for by the rule and remain agile to pivot as needed. For some this may mean restructuring practices and preparing for strategic investments, such as digitized solutions to meet the demands set forth by Basel III.
While compliance will undoubtedly be important, it’s essential to recognize that Basel III’s impact extends beyond adherence to regulations; it’s about cultivating a resilient and sustainable banking ecosystem. Its implementation is expected to introduce transparency, potentially illuminating gaps within the industry and prompting necessary reforms.
The hyper requirements of Basel III have the potential to open the lines of communication between banks and regulatory experts to ensure compliance and address emerging challenges.
Crowdfund Insider: What are the regulatory considerations financial institutions need to keep in mind?
Tracy Moore: The rule looks to implement standardized measurements by focusing on two methodologies. The capital requirements are expected to increase by 19% for Category I and II firms, which encompass those with assets exceeding $700 billion, while experiencing a 6% increase for Category III firms ($250 billion) and Category IV domestic firms ($100 billion). These capital requirements can present a challenge as banks need to adopt a new expanded risk-based approach. The expanded approach includes standardized risk-weighted assets for credit, equity, operational, and credit valuation adjustment risk.
Financial institutions must also consider liquidity requirements and look to implement frameworks to comply with the Liquidity Coverage Ratio (LCR) and the Net Stable Funding Ratio (NSFR) – liquidity ratios set forward to help banks with liquidity management practices and be prepared in the case of a liquidity stress event. The goal is to position banks in a place where they can successfully navigate wavering market conditions and proactively support growth.
With these rigorous capital calculation requirements and liquidity frameworks, banks must look toward advanced technology solutions to navigate these complexities. The right technology can empower banks to refine their risk modeling capabilities. This ensures they can accurately calculate and manage risk in real-time, facilitating more informed decision-making processes.
Crowdfund Insider: What role do you see technology playing in facilitating compliance with Basel III requirements and optimizing risk management practices?
Tracy Moore: Aside from supporting risk modeling capabilities, incorporating effective technology into a financial institution’s infrastructure is essential; it not only boosts banks’ compliance capabilities but also ensures they remain nimble to address changes. By leveraging the right tech, financial institutions can automate and optimize their compliance processes, reducing manual errors and inefficiencies and improving workflows.
This not only positions banks to better manage and withstand liquidity stress events but also equips them to adapt to fluctuating market conditions more dynamically.
Without proper technology solutions or appropriate tools to streamline regulatory requirements, banks risk falling behind. Having proper tools in place can also help financial institutions secure a competitive advantage as they are in a better position to respond to evolving regulatory landscapes.
Additionally, Basel III will most likely introduce a fresh set of unprecedented data challenges. This can serve as a catalyst for technological innovation as the industry endeavors to address and adapt to these emerging demands. For example, risk-based modeling represents a niche market with specific nuances that will be ripe for innovation. Banks and RegTech will have an opportunity to collaborate closely, working hand-in-hand to navigate regulatory challenges and drive innovation.
Crowdfund Insider: What strategies do you suggest financial institutions adopt to prepare for the implementation of Basel III, taking into account the timeline and potential complexities?
Tracy Moore: As the age-old proverb goes, “By failing to prepare, you are preparing to fail,” and this sentiment holds true here as well. The first question banks should ask themselves is: have you assessed your technology and infrastructure? If not, now is the time to consider doing so and lining up the proper technological tools that will help facilitate this significant change. It’s important to ensure that your technology capabilities and infrastructure are up to par to effectively navigate the intricacies of regulatory changes like Basel III.
Moreso, it’s essential to have a thorough understanding of the regulations and develop a comprehensive strategy for managing data, as this aspect often poses a significant challenge. Engaging various operational departments, including compliance, legal, and risk modeling teams, ensures a holistic perspective is considered.
Additionally, seeking feedback from regulators can provide valuable insights and help refine compliance efforts. Banks should be transparent about where they are and where they might be in the future regarding the new risk-based capital framework. Working together with regulators can help banks gain insights and guidance and overall contribute to long-term success.
