Dear.
No, the title is not a mistake.
If you look at the dates of publication of the three first international solvency agreements, you will see that Basel I was published on 1988 and enforced by law on 1992. Basel II agreement was published on 2004 and Basel III on 2011.
Following that progression, we should have a new international solvency agreement for banks very soon.
But beyond that, there're a number of signals that make me think that Basel 4 is closer than expected.
Several countries, including the US and the Eurozone are implementing higher capital requirements for banks than Basel 3 requirements.
There’s a growing feeling amongst regulators against giving bank’s risk executives liberty for implementing Internal Rating methods for calculating the bank’s Risk Weighted Assets, and consequently the regulatory capital, advocating for more simple, easier to audit models.
A new simple, leverage ratio, it is been implemented for compensating the difficulties on auditing the bank’s internal models.
In general, the tendency is increasing the capital requirements of banks and disclosure capabilities of their risk management information systems. This is just a consequence of the systemic crisis; remember that natural resources scarcity and global debt are limiting global economic growth.
Limited growth means scarce capital; in a fractional reserve banking system (like today’s), lack of capital produces financial instability. As a consequence regulators increase the bank’s capital requirements for recognizing the critical value of this growth generating resource.
I understand that some of you don’t share my opinion; for those of you who think that the new regulation is just a temporary fashion, let me remind you that some authorized voices, like Eugene Fama, 2013 Nobel Prize in Economics, is advocating for capital requirements for banks which should be around 40 or 50% of the bank’s assets; 4 times what currently Basel 3 agreement requires.
http://baselinescenario.com/2010/06/02/eugene-fama-too-big-to-fail-perverts-activities-and-incentives/
This scenario, which represents a threat for the old banking model, is a great opportunity for those who understand the driver of the new model.
If efficient capital management is the priority in the new model, capital optimization must be at the center of the bank’s strategic decisions.
Capital optimization requires first, an integrated vision of all capital consumption activities of a bank, offering an accurate measure of the capital consumed in each of them. In a second step it requires optimizing the capital consumed in every activity, and prioritizing those activities which offer a better return weighted by consumed capital.
Capital consumption is embedded in every banking activity; from maintaining dynamically the free-line of a revolving loan, to measuring accurately the probability of default of a counterpart, and taking pre-emptive actions before the default event happens.
An integrated vision of all the capital consuming activities of the bank requires an integrated information system, and the most holistic integrated information system for banks is SAP.
SAP does not have a capital optimizer yet, but it has the Bank Analyzer system which is capable of collecting, storing and managing the capital consumed in every banking activity.
The Integrated Financial and Risk Architecture of Bank Analyzer offers those capabilities and I’m explaining them to my customers in my daily work; and in these internet activities for the last 6 years.
In my opinion, it’s a matter of time that SAP sees the opportunity and develops a capital optimizer on top of the Integrated Financial and Risk Architecture, the systemic change is bringing the requirement and developing a market eager to implement it.
Looking forward to read your opinions.
K. Regards,
Ferran.
No, the title is not a mistake.
If you look at the dates of publication of the three first international solvency agreements, you will see that Basel I was published on 1988 and enforced by law on 1992. Basel II agreement was published on 2004 and Basel III on 2011.
Following that progression, we should have a new international solvency agreement for banks very soon.
But beyond that, there're a number of signals that make me think that Basel 4 is closer than expected.
Several countries, including the US and the Eurozone are implementing higher capital requirements for banks than Basel 3 requirements.
There’s a growing feeling amongst regulators against giving bank’s risk executives liberty for implementing Internal Rating methods for calculating the bank’s Risk Weighted Assets, and consequently the regulatory capital, advocating for more simple, easier to audit models.
A new simple, leverage ratio, it is been implemented for compensating the difficulties on auditing the bank’s internal models.
In general, the tendency is increasing the capital requirements of banks and disclosure capabilities of their risk management information systems. This is just a consequence of the systemic crisis; remember that natural resources scarcity and global debt are limiting global economic growth.
Limited growth means scarce capital; in a fractional reserve banking system (like today’s), lack of capital produces financial instability. As a consequence regulators increase the bank’s capital requirements for recognizing the critical value of this growth generating resource.
I understand that some of you don’t share my opinion; for those of you who think that the new regulation is just a temporary fashion, let me remind you that some authorized voices, like Eugene Fama, 2013 Nobel Prize in Economics, is advocating for capital requirements for banks which should be around 40 or 50% of the bank’s assets; 4 times what currently Basel 3 agreement requires.
http://baselinescenario.com/2010/06/02/eugene-fama-too-big-to-fail-perverts-activities-and-incentives/
This scenario, which represents a threat for the old banking model, is a great opportunity for those who understand the driver of the new model.
If efficient capital management is the priority in the new model, capital optimization must be at the center of the bank’s strategic decisions.
Capital optimization requires first, an integrated vision of all capital consumption activities of a bank, offering an accurate measure of the capital consumed in each of them. In a second step it requires optimizing the capital consumed in every activity, and prioritizing those activities which offer a better return weighted by consumed capital.
Capital consumption is embedded in every banking activity; from maintaining dynamically the free-line of a revolving loan, to measuring accurately the probability of default of a counterpart, and taking pre-emptive actions before the default event happens.
An integrated vision of all the capital consuming activities of the bank requires an integrated information system, and the most holistic integrated information system for banks is SAP.
SAP does not have a capital optimizer yet, but it has the Bank Analyzer system which is capable of collecting, storing and managing the capital consumed in every banking activity.
The Integrated Financial and Risk Architecture of Bank Analyzer offers those capabilities and I’m explaining them to my customers in my daily work; and in these internet activities for the last 6 years.
In my opinion, it’s a matter of time that SAP sees the opportunity and develops a capital optimizer on top of the Integrated Financial and Risk Architecture, the systemic change is bringing the requirement and developing a market eager to implement it.
Looking forward to read your opinions.
K. Regards,
Ferran.
