The right treasury system for Basel III
Thought Paper
www.infosys.com/finacle Universal Banking Solution | Systems Integration | Consulting | Business Process Outsourcing
The right treasury system for Basel III Responding to one of the worst financial crises in history, regulators made some major changes in the way Banks are regulated. One of these, the Basel III Accord, has far reaching consequences for the Banking business and its systems. With Basel II as its foundation, Basel III focuses on capital requirement, liquidity, leverage and counterparty risk.
Most of these have direct implications for a Bank's treasury system including some serious challenges:
Data availability
Basel III primarily aims to:
With the additional requirements, it is essential for Banks to focus on capturing and maintaining appropriate data required for monitoring, control and regulatory reporting.
• Improve Banks' ability to withstand market
Data consistency
shocks by increasing the quality and quantity of minimum capital
• Provide better risk coverage by focusing on counterparty credit risk and collateral management
Basel III requires data to be consolidated across the Bank, as well as captured and maintained accurately, at a certain level of granularity.
Real time capability
• Limit the effects of panic deleveraging by
Basel III pushes systems to provide data in real time, particularly in the area of liquidity.
constraining leverage
• Dampen pro-cyclical effects during a crisis by creating countercyclical buffers and tweaking provisions
• Enhance short term liquidity by stipulating a
In this paper we will see how a Bank's treasury system must be geared in order to comply with Basel III.
minimum threshold
Dat Availabilit a y
Base III Compliance
Liquidity
Real Capabilit Time y
Dat Consisten a cy
Real Time Liquidity Position
02
Thought Paper
Asset Liability Gap Views
Counterparty Credit Risk
Leverage
Credit Value Adjustment (CVA) Data Requirements
On Balance Sheet exposure
Collateral Management
Off-Balance Sheet exposure
Asset Valuation for funding requirements Reporting Infrastructure
Liquidity Short term liquidity Under Basel III, Banks are required to closely monitor their liquidity positions. Therefore their treasury system must have the capability to monitor liquidity in real time across currencies, over different time horizons, with precision. It must provide a "liquidity view" which can be used to monitor cash flows across asset classes or specific deal types / trading books, and it should be possible to consolidate these values into a single currency, if required. Further, it should be possible to simulate the liquidity position for stressed market inputs for any or all currencies, which is an essential input for Liquidity Coverage Ratio (LCR) and LCR by significant currency ratios.
Stable funding The Net Stable Funding Ratio (NSFR) encourages Banks to maintain stable sources of funding even under stressed scenarios. The treasury system's position keeping module must have the ability to value assets and liabilities under any stressed market input, which in turn can be used for the calculation of NSFR.
Contractual maturity mismatch Basel III prescribes monitoring of contractual cash flow and security mismatches across time buckets. This requires the Bank's treasury system
to have a very flexible real time asset - liability cash flow mapping that provides precise gap information across time buckets. The system must also provide securities positions across any time bucket. All these time bucket views should be completely user configurable and capable of being drilled down to exact dates. It should be possible to generate a snapshot of these positions for regulatory reporting.
Concentration funding The Concentration Funding Ratio is used to monitor Banks' liabilities against significant counterparties, instruments and in significant currencies. The treasury system must be able to report all assets and liabilities for different counterparties, currencies and instruments in detail, which is required to generate the Concentration Funding Ratio. Additionally, the position keeping module must be able to monitor and control positions against significant counterparties, if desired.
Unencumbered assets The treasury system's collateral management feature must track and report collaterals that have been posted with counterparties as well as maintain collaterals posted by the counterparties, all of which is necessary for reporting unencumbered assets.
Thought Paper
03
Counterparty credit risk Credit Value Adjustment (CVA) CVA is an integral part of Basel III for handling counterparty risk. Accordingly, the system ought to provide relevant exposure and collateral data across asset classes for calculation of CVA.
Collateral management Collateral management is an area of specific focus in Basel III. Ideally, the treasury system's collateral management module must be ISDA compliant and support collaterals for multiple exposures based on collateral agreements
entered into between counterparties. The system must also support on-demand revaluation of collaterals, haircut maintenance and margin maintenance, for use by the collateral management unit proposed by Basel III.
Credit ratings Basel III encourages Banks to use internal ratings in conjunction with external ones. Therefore, the treasury system must support capture of multiple external credit ratings and report relevant data for internal assessments.
Leverage Basel III aims to constrain excess leverage so as to avoid the kind of deleveraging seen during the crisis. The treasury system should be capable
of reporting on and off balance sheet exposures of supported assets, which are the primary inputs for the calculation of the Leverage Ratio.
The bottom-line The growing complexity in the regulatory environment, such as that ushered in by Basel Regulations makes it difficult to manage multiple systems in the treasury function. What
is needed is a scalable treasury system with a fully integrated front to back office structure, capable of supporting multiple assets.
Karthik S, FRM Product Consultant, Infosys
04
Thought Paper
About Finacle Finacle from Infosys partners with banks to transform process, product and customer experience, arming them with 'accelerated innovation' that is key to building tomorrow's bank. For more information, contact Finacleweb@infosys.com
www.infosys.com/finacle
Š 2012 Infosys Limited, Bangalore, India, Infosys believes the information in this publication is accurate as of its publication date; such information is subject to change without notice. Infosys acknowledges the proprietary rights of the trademarks and product names of other companies mentioned in this document.