Lobbying efforts by financial institutions to have the Basel III rulings dropped or drastically altered are futile, says Orlando Hanselman, education programs director, Risk & Compliance, Fiserv. Instead, he says, institutions should adapt to the directives requirements early by implementing an enterprise risk management framework in order to gain a competitive advantage over their peers.
In an interview with GlobalCustodian.com, Hanselman notes that the unprecedented changes that Basel III will bring to a financial institutions business model, resulting in a regulated and less profitable utility type business model, has concerned the majority of these institutions that are satisfied with the status quo. However, he says, this concern is inappropriately expressed as resistance and lobbying efforts to change the Basel III rules. Its a failure to grasp the significant awakening that has occurred among all constituencies from the mainstream customers and the Wall Street lenders that is the result of the depth and veracity of the subprime crisis, says Hanselman.
Hanselman says that instead of lobbying, an early adaptation to Basel III requirements by institutions he calls progressives will give them a competitive advantage over the recalcitrants, or lobbyists. Because we have so many recalcitrant players in the industry, early adopters can actually buy early adaptation of this and stand out among the crowd, create a competitive difference and really lower their cost of capital compared to their peers, as well as increase their ability to attract capital and cheaper deposits.
Hanselman has noticed that over the past 12-18 months the number of progressive financial institutions that are seeing the sense of being early adaptors to Basel III has been increasing significantly. I would say its still in the minority, but somewhere in the neighborhood of 25-40% of financial institutions are now awakening to the reality that this shall not pass and they should seize the moment and turn it into an advantage instead of a burden, he says. The activities over the last 12 to 18 months have increased significantly to the point that resource allocation is becoming an issue.
Hanselman adds that regulators are looking for institutions to show signs of compliance now. One area is the 30-day liquidity coverage ratio mandated by Basel III – all regulators I talk to tell me theyre all looking for any size financial institution to show progress in being able to measure that liquidity coverage ratio. Its starting with these globally significant financial institutions but its going to quickly filter down and some of my best engagements have been with institutions that are well below this group of global systematic importance.
Hanselman sees the Basel III regulations as a privilege that is going to be granted to financial institutions in order to right size their capital and their liquidity as well as enable them to execute capital-optimizing strategies. In order to follow such strategies such as mergers and acquisitions, capital leveraging, share buybacks and actual payment of dividends, they must demonstrate integrated enterprise risk management, based on the Basel III elements of strong risk analytics as well as robust stress testing. Theyre going to earn that privilege by demonstrating best practices, integrated enterprise risk management and that has to be based on a foundation of strong risk analytics as well as robust stress testing, all the key elements of Basel III. That is why this percentage recalcitrant, while still incredibly vocal is really decreasing in size.
He continues: The only way ever to have safely leveraged your capital is to base it on a complete understanding, on an integrated basis of all your risk components. So you have to have, before you begin these opportunistic leveraging strategies, an understanding of how much risk you have embedded with within your financial business model and how much capital you have to safely support that level of risk. You have to right size your capital so that you have the right level to fully cover your risk profile appropriately.
Hanselman suggests that financial institutions cannot make this journey to Basel III compliance economically and efficiently alone. Theyre going to need strong analytical software support that not only measures and analyses all forms of risk but puts it into an enterprise risk management framework and allows them to look at risk on a stress tested basis across all spectrums of probability and risk type. Theyre also going to need education, at the board of directors level and financial executive education. They also need a gap analysis between their current position and best practice position. Regulators today are demanding that that kind of assessment be done and that kind of plan be put in place.
(JDC)