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Basel III: Don’t buy an umbrella; build a boat

"A bolder approach – and one more likely to succeed – is to identify the optimum model to succeed in a Basel III, Dodd-Frank and EMIR world, and build towards it, accepting interim solutions only where absolutely necessary."


The scale of global regulation hitting banks is unprecedented. Basel III, in particular, has transformative implications. Not only will it affect banks’ bottom lines by bringing in stricter capital requirements, but it will also reinforce many of the measures brought in through other acts. It will, for example, support the Volcker Rule within the Dodd-Frank Act, which restricts US banks from certain activities deemed speculative. 

Piecemeal responses that take Basel III and other regulations as they come – or drawn-out responses that make many small, incremental changes over time – will leave banks a long way from where they need to be to thrive in the new operating environment.

To respond to Basel III in a way that makes sense for their business, banks need a bold, planned and sustained response. For a storm on this scale, they need more than an umbrella: they need to build a boat.

Boldness for a new world

Regulators envision a world in which the spirit, as well as the letter, of the rules is enforced. This would mean a banking industry in which organisations compete on their ability to control risk and maintain high standards of capital adequacy. As a result, it is not enough for banks to adopt an approach that simply takes the shortest route from status quo to compliance.

A bolder approach – and one more likely to succeed – is to identify the optimum model to succeed in a Basel III, Dodd-Frank and EMIR world, and build towards it, accepting interim solutions only where absolutely necessary.  

Bold responses to regulation can already be seen in the market: UBS has laid off 10,000 staff as part of a wholesale retreat from fixed income, and other banks are moving into new areas, such as Goldman Sachs expanding its reach in private wealth management. For some banks, such as Credit Suisse, a $1bn play to grow a perceived strength in fixed income aims to maintain profitability in what it calls the ‘new Basel III world’.

Exhaustive planning

Basel III forms a complex set of rules and will affect different business lines in different ways, with some costs being felt far from the immediate imposition of charges.  

As a result, strategic objectives need to be thought through at every level to ensure banks remain balanced both during and after the proposed changes. In particular, banks need to take account of the whole gamut of regulatory change initiatives. They need to look across the full spectrum of activities – including product, service and corporate development – to determine whether these are optimised to the desired end state.

Sustained focus

In a multi-year implementation, plans will need to be retooled to remain relevant over time as the landscape changes. This requires regular or event-triggered reviews (preferably independent from delivery) across the whole programme of business and regulatory change, during which the current direction of travel is compared – taking into account all the inevitable design trade-offs and changes involved in large programmes – with the long-term Basel III vision, ensuring that the right position is achieved.

Without this bold, exhaustive and sustained action to meet Basel III, it is highly unlikely that Banks will grow into what is required – our experience in regulatory change (and building boats) is that storm-worthy vessels don’t get built by accident.

To see how PA can help your organisation meet Basel III requirements contact us now.

Contact the financial services team

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