Mandatory Basel III monitoring from 2022 onward

Christian Schiele, Partner at zeb: „Actions speak louder than words“

Christian Schiele, zeb

Mr. Schiele, at the beginning of the year the European Banking Authority (EBA) decided to make participation in the Basel III monitoring exercise – up to now a voluntary undertaking – mandatory for a wide range of institutions from the end of 2021. What does this mean for the institutions concerned?
: The group of participants includes all significant institutions (SIs), but also certain less significant institutions (LSIs) – in each EU country, up to 30 institutions are concerned. 
Many of these institutions have spent years getting to grips with the upcoming changes from the final Basel framework, such as the new Credit Risk Standardized Approach (CRSA) or the revised Credit Value Adjustment (CVA) methodology, and have been carrying out specific quantifications for their institutions. 
As these impact analyses are often performed on a (partially) aggregated basis, the level of detail and also the accuracy of the assumptions made are usually not sufficient to meet the requirements of Basel III monitoring. In particular, the exercise requires calculations at individual transaction level, comparable to COREP reporting.

Does that mean that can institutions use their COREP reporting infrastructure to carry out the monitoring exercise?
Definitely not. Although the exercise is indeed based on COREP data, a large amount of supplementary information which is not currently available in the reporting system, e.g. from risk controlling or collateral management, is required for individual transactions. Other data, such as external ratings for receivables from banks, usually has to be linked completely from scratch. All of this must then be combined into a user-friendly integrated data basis. The calculation logic also differs considerably from the regulations that are currently applicable. Therefore, the institutions will typically need additional calculation tools outside the reporting infrastructure that can map both the data basis and the calculations. This entails a certain amount of complexity and challenges. The tools have to be developed or purchased and then implemented in the bank.

The key date for data collection is December 31, 2021, and the data has to be submitted no earlier than in April 2022. Do the institutions really have to deal with the requirements right now?
Definitely yes. In particular, institutions that have not already voluntarily participated in Basel III monitoring in the past and thus have to set up everything from scratch should not wait until 2022 to start preparing. Especially at the beginning of the year, there are often capacity bottlenecks resulting from work on the annual financial statements and the preparation of year-end reports in the areas involved. It is therefore advisable to start preparations before the end of the year.

The EBA has not yet published the exact requirements. What kind of preparations would make sense from your point of view?
Experience has shown that the data requirements can be analyzed based on the final Basel rules. I would also recommend developing the target architecture, including the selection and implementation of the costing tools and the data connections, before the end of the year. This will make it easier to prepare the actual report in the first quarter of 2022.

That sounds like quite an undertaking. What’s in it for the institutions?
That’s right, it is pretty much a preliminary project for the actual CRR III implementation. But this is exactly where I see the benefit for the participants. Firstly, by taking a detailed look at the requirements and the prototypical implementation of the calculation logics, the banks will gain deep insights into the logic of the new regulations and get to know the data requirements. This will enable them to plan the actual implementation of the new regulations. 
Secondly, the significant increase in representativeness will provide supervisory authorities and legislators with a reliable basis for calibrating methodologies, which in turn may result in more favorable capital requirements for institutions (e.g. future use of loan splitting in real estate financing). 
And last but not least, the institutions themselves will get a clear picture of the impact of the legislative changes on their portfolio at an early stage – which in turn will allow anticipated effects in planning and management to be taken into account early on.


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