Basel IV Compliance: Strategies and Tools for Success.

Overview

In December 2020, the European Banking Authority (EBA) highlighted that EU banks face a €52 billion capital shortfall to comply with the finalised Basel III reforms, commonly called Basel IV. These reforms aim to enhance the credibility of risk-weighted assets (RWA) calculations and ensure greater comparability of banks’ capital ratios. Despite concerns over increased capital requirements and potential impacts on return on equity and business models, implementing these reforms effectively is crucial to avoid operational and maintenance costs that could undermine business and portfolio optimisations.

Navigating the complex landscape of Basel IV reforms is a significant challenge for EU banks. Successfully implementing these reforms requires a strategic approach, especially in solution design and data modeling. In this blog, we will explore the key considerations and best practices for integrating Basel IV requirements into banks' regulatory and reporting frameworks, with a particular emphasis on how Oracle's Financial Services products can de-risk and accelerate delivery.

Solution Design Strategy

Current regulatory capital management and reporting solutions were initially designed for the more straightforward Basel II requirements. As banks adapt to Basel IV, a flexible, scalable, and modular approach is not just a nice to have. It's a necessity. Without it, banks risk accumulating technical debt from iterative updates. A well-designed solution, on the other hand, should support automation and standardisation, enabling efficient regulatory revisions and strategic decision-making implementation.

Oracle's Financial Services Global Industry Unit (OSGIU) has a suite of purpose-built solutions to assist banks by providing comprehensive risk management and regulatory compliance solutions. In their first iteration, the products were referred to as Oracle Financial Services Analytical Applications (OFSAA). Oracle has completely refreshed the OFSAA products and is gradually releasing them as a series of SaaS products. Given this change, this blog will refer to the solutions as Oracle Banking Analytics Cloud Services or OBACS. 

OBACS's modular design empowers banks to quickly scale and customise their systems to meet Basel IV requirements. The system's robust automation and standardisation capabilities enable banks to implement regulatory changes with fewer resources and lower complexity, streamlining their operations and ensuring compliance.

Key Takeaways

• Basel IV requires flexible and scalable solutions to avoid technical debt.
• Automation and standardisation are crucial for efficient regulatory updates.
• Solutions should support strategic decision-making and stress-testing exercises.
• Oracle's OBACS provides modular, scalable solutions with solid automation and standardisation features.
  
  

Basel III Reforms Overview

Basel IV encompasses various revisions to the initial Basel III requirements, focusing on improving the consistency of RWA calculations. Key reforms include revised approaches to credit risk and operational risk and the introduction of output floors and leverage ratios.

Oracle’s OBACS solutions are designed to adapt to these revisions, ensuring banks can effectively meet the updated Basel III requirements. OBACS provides detailed frameworks for implementing revised credit risk, operational risk, and leverage ratio calculations, helping banks navigate these changes with less complexity.

Key Takeaways

• Basel IV includes significant revisions to Basel III requirements.
• Reforms focus on improving the consistency of RWA calculations.
• Banks must stay aware of implementation deadlines and operational impacts.
• OBACS supports the implementation of revised Basel III requirements with detailed, adaptable frameworks.

Data Modelling

A robust regulatory capital data model is central to successful Basel IV implementation. It must accurately capture and standardise the necessary data elements for calculations and reporting. Banks often struggle with fragmented data sources, leading to increased preparation efforts and over-reliance on IT. Best practices in data modelling, such as reduced data redundancies and strong controls for data quality, are essential.

Oracle's OBACS offer a robust data management framework that ensures data integrity, consistency, and scalability. OBACS helps standardise data across various sources, reducing preparation time and improving data quality. Its comprehensive data modelling capabilities support banks in capturing all necessary data elements for Basel IV compliance.

Key Takeaways

• Robust data models are crucial for accurate Basel IV implementation.
• Standardisation reduces preparation efforts and reliance on IT.
• Best practices in data modelling ensure quality and scalability.
• OBACS enhances data integrity and consistency, providing a solid foundation for Basel IV data requirements.
  
  

Calculation Engines

Banks need agile computational capabilities to adapt efficiently to Basel IV's dynamic regulatory requirements. While in-house solutions were sufficient for more straightforward calculations, the complexity of Basel IV often makes vendor solutions more appealing. Vendor solutions offer economies of scale, technical expertise, and system maintenance support. However, banks must perform thorough due diligence to select the right solution for their unique needs.

Oracle's OBACS provides advanced calculation engines designed to handle the complex computations required by Basel IV. These engines are highly efficient at performing multiple regulatory approaches and stress-testing exercises. OBACS’s pre-built solutions are regularly updated to comply with the latest regulatory standards, ensuring banks remain compliant without excessive internal updates.

Key Takeaways

• Agile computational capabilities are essential for adapting to Basel IV.
• Vendor solutions offer benefits but require careful selection.
• Effective management of both in-house and vendor solutions is critical.
• OBACS's advanced calculation engines support complex Basel IV computations and ongoing regulatory updates.
  
  

Regulatory Reporting

Basel IV’s extensive reporting requirements necessitate robust internal and external reporting capabilities. A standardised data model ensures consistency across various reporting activities, enhancing transparency and auditability. Automation can reduce manual efforts, improving efficiency and data quality.

OBACS includes comprehensive reporting tools that automate the generation of regulatory reports, reducing the manual effort involved in data aggregation and reconciliation. These tools ensure consistency and accuracy in reporting, supported by OBACS’s standardised data models. Oracle’s reporting solutions also provide transparency and auditability, which are crucial for meeting Basel IV’s stringent requirements.

Key Takeaways

• Extensive reporting capabilities are required for Basel IV compliance.
• Standardised data models enhance consistency and auditability.
• Automation improves efficiency and data quality.
• OBACS’s automated reporting tools enhance consistency, accuracy, and transparency in regulatory reporting.
  
  

Output Floors

Basel IV introduces output floors to limit the regulatory capital benefits banks can derive from internal models. This requires banks to produce results for both internal models and standardised approaches, doubling the operational workload. Effective calculation engines and data models are essential to manage this increased intensity.

OBACS’s calculation engines are equipped to handle the dual reporting requirements imposed by output floors. The engines are designed to efficiently compute results for internal models and standardised approaches, reducing the operational burden on banks.
 

Key Takeaways

• Output floors limit benefits from internal models.
• Doubling operational workload requires efficient calculation engines.
• Effective data models are crucial for managing increased intensity.
• OBACS’s engines efficiently manage dual reporting requirements, easing operational workloads.

Standardised Approach for Credit Risk

The revised standardised approach for credit risk improves granularity and sensitivity. Banks must update their data models to account for additional rating categories and segmentation, ensuring accurate calculations and reporting.

OBACS’s data modelling capabilities support the integration of new rating categories and segmentation required by the revised standardised approach for credit risk. The solution ensures accurate data capture and processing, facilitating precise calculations and comprehensive reporting.

Key Takeaways

• The revised approach improves granularity and sensitivity in credit risk.
• Data models must be updated to reflect new requirements.
• Accurate calculations and reporting depend on comprehensive data updates.
• OBACS’s data models support the integration of new credit risk categories, ensuring precise calculations.
  
  

Input Floors and Restricted Approaches

To address variability in IRB models, Basel IV introduces input floors and restricts the use of advanced approaches. This increases capital requirements, prompting banks to reassess their portfolios and calculation approaches. Operational adjustments are necessary to comply with these changes.

OBACS provides configurable parameters to incorporate input floors and restricted approaches within its calculation engines. This flexibility allows banks to quickly adapt to regulatory changes and reassess their portfolios with accurate, up-to-date calculations.

Key Takeaways

• Input floors and restricted approaches address variability in IRB models.
• Increased capital requirements may prompt portfolio reassessment.
• Operational adjustments are necessary for compliance.
• OBACS’s configurable parameters facilitate quick adaptation to regulatory changes, supporting portfolio reassessment.
  
  

Operational Risk

The new standardised approach for operational risk combines gross income and internal loss history, simplifying calculations but requiring new processes and data collection. Banks must ensure accurate and comprehensive data to meet these requirements.

OBACS supports collecting and processing necessary data for the new operational risk framework. Its analytical capabilities simplify the calculation of operational risk capital, efficiently integrating gross income and loss history data.

Key Takeaways

• The standardised approach simplifies operational risk calculations.
• New processes and data collection are required.
• Accurate data is essential for compliance.
• OBACS simplifies operational risk calculations by integrating comprehensive data collection and processing capabilities.
  
  

Credit Valuation Adjustment Risk

Revised CVA risk requirements align with market risk principles, necessitating more granular and risk-sensitive calculations. Banks must adjust their calculation engines and evaluate how they record CVA weight mappings, especially for hedges.

OBACS’s flexible calculation engines are designed to handle the complex requirements of CVA risk, incorporating granular data and sophisticated risk-sensitive calculations. The solution also supports the integration of CVA hedges, ensuring comprehensive risk assessment.

Key Takeaways

• Revised CVA risk requirements are more granular and risk-sensitive.
• Calculation engines must be updated for accurate CVA calculations.
• Effective management of CVA weight mappings and hedges is crucial.
• OBACS’s engines support granular CVA risk calculations and integration of CVA hedges for comprehensive assessment.
  
  

Leverage Ratio

The leverage ratio buffer for global systemically important banks (G-SIBs) requires comprehensive data integration across finance and risk functions. This non-risk backstop to capital rules prevents unsustainable leverage build-up, emphasising the need for seamless data integration.

OBACS facilitates seamless data integration across finance and risk functions, ensuring accurate leverage ratio calculations. Its comprehensive data management capabilities support collecting and processing all necessary data elements for leverage ratio compliance.

Key Takeaways

• The leverage ratio buffer requires comprehensive data integration.
• It acts as a non-risk backstop to prevent unsustainable leverage.
• Seamless data integration across functions is essential.
• OBACS’s data management capabilities ensure seamless integration and accurate leverage ratio calculations.
  
  

Fundamental Review of the Trading Book

FRTB introduces new market risk practices, requiring significant amounts of market risk and transaction data. Banks must update their data models and ensure compliance with new calculation requirements, focusing on data quality and auditability.

OBACS’s advanced data models and analytical capabilities support the extensive data requirements of FRTB. The solution ensures high data quality and auditability, facilitating compliance with the new market risk practices and calculation requirements.

Key Takeaways

• FRTB introduces new market risk practices with increased data requirements.
• Data models must be updated to meet new calculation requirements.
• Focus on data quality and auditability is essential for compliance.
• OBACS supports FRTB compliance with advanced data models and analytical capabilities, ensuring high data quality.
  
  

Conclusion

Basel IV presents significant challenges and opportunities for banks, necessitating a strategic approach to compliance and optimisation. Banks can effectively implement these reforms by prioritising flexibility, scalability, and robust data management, ensuring regulatory compliance and strategic business optimisation.

Oracle’s OBACS solutions offer comprehensive support across all these areas, enabling banks to navigate Basel IV requirements with confidence and at a lower cost. 

With Oracle’s advanced analytical capabilities, automated processes, and scalable cloud solutions, banks are well-equipped to turn Basel IV's compliance demands into practical success. The right tools and strategies not only ensure compliance but also enhance operational efficiency and decision-making, positioning banks for sustained growth and resilience in an evolving regulatory landscape.

How can we help?

Revvence can help in several valuable ways:

• Review your existing Basel reporting processes and compare the approach to best practices.
• Create a proof-of-concept to show you how the Oracle solutions can compliment and accelerate in-house solutions.
• The design and delivery of end-to-end Basel (and IFRS) compliance and reporting solutions.
• Check out Revvy, our Narrow-GPT for Finance Transformation. Read all about Revvy here.