Basel, Switzerland. Photo: Moritz Frei / Shutterstock
One of the biggest changes coming to banks is a new rule called Basel III.
As the “III” implies, this is actually the third installment of the Basel Accords, a set of rules created in response to the financial crisis in order to prevent future systemic bank failures.
Basel III builds on part I and part II by focusing on protecting institutions during a bank run, which requires differing levels of reserves for different kinds of deposits and debt.
Naturally, this crimps bank profitability making it harder for FIs to leverage their balance sheets. As KPMG explained in their 2011 Basel III report:
Increased capital requirements, increased cost of funding, and the need to reorganize and deal with regulatory reform will put pressure on margins and operating capacity. Investor returns will likely decrease at a time when firms need to encourage enhanced investment to rebuild and restore buffers.
How regulators have decided to categorize various assets will also have an impact on balance sheet requirements and capital markets—and in term liquidity. For instance, there’s a huge difference between government debt, which is considered essentially risk free, versus corporate debt, which is in turn seems relatively toxic. This could make funding and working capital more expensive for companies.
Perhaps the biggest challenges, however, will come down to reporting. Financial institutions are used to reporting quarterly, monthly, or, at the worst, daily. In the future, the expectation will be real-time liquidity reporting. It’s hard to concretely say where or when, since each jurisdiction will decide its own policies and timeline for Basel III implementation (the current deadline is 2019, already delayed multiple times).
That’s where digitizing platforms can be such a boon, giving banks a snapshot of their liquidity situation at a moment’s notice, reducing reporting costs but also boosting efficiency, which in turn allows better usage of the bank’s balance sheet.