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The Smart Way to Achieve Basel IV Compliance Through an Effective Data Governance Framework

Reading time: 9 min   |  By Sonia Chopra   |  Published in Articles,

Within the last four decades, there have been many economic and financial crises that have tested the financial industry, which has brought banks’ resiliency into question. As a result of these downturns, numerous regulatory requirements have been issued globally to keep banks accountable and prepared for future events.

Basel Committee for Banking Supervision (BCBS) is one such regulatory body that continues to issue stringent regulatory requirements. The regulatory body’s goal is to enhance financial stability by improving the quality of banking supervision worldwide and to serve as a forum for regular cooperation between its member countries on banking supervisory matters (Source). Ultimately, the committee aims to implement regulations designed to make financial institutions more resilient and to instill confidence back in the industry.

Basel IV is BCBS’ latest regulation that looks to supplement and strengthen previous Basel regulations (Basel I through III). It is scheduled to commence in 2022 and will be completed by 2027. Before analyzing Basel IV, it is important to understand its predecessors.

  • Basel I was formed with the main objective of enumerating a minimum capital requirement for financial institutions.
  • Basel II was established to introduce supervisory responsibilities and to further strengthen the minimum capital requirement.
  • Basel III was created to specify an additional buffer of equity to be maintained by banks. Additionally, Basel III was implemented to ensure the stability of the financial markets by increasing the quantity and quality of capital and liquidity (Source).
  • BCBS 239 provided a foundational framework to address and help resolve banks’ critical weaknesses in understanding and accurately demonstrating their overall exposures and key risk factors.

Basel Compliance Through Effective Data Governance

An Overview of Basel IV

Basel IV is a group of proposed regulatory reforms that updates the ways by which banks calculate their capital requirements. The objective is to ensure that financial institutions are more comparable across the industry globally. The regulation is summarized as a fundamental review of the trading book (FRTB) and focuses on the market’s risk regulatory framework. In effect, it is rewriting the global market risk capital rules, while clarifying the following elements:

  1. It restricts the use of internal-ratings based (IRB) methods to credit risk calculations and changes risk parameters.
  2. The Credit Valuation Adjustment (CVA) is now more risk-sensitive and granular. Additionally, revisions require that all Securities Financing Transactions (SFTs) be included in the CVA framework.
  3. To lower operational risk, a single standardized approach is implemented, based on extensive data relating to operational risk losses and exposures in a wide range of banks.
  4. New requirements and amendments are added to the exposure method used for calculating the leverage ratio (leverage ratio % = capital measure ✕100).
  5. One of the key focuses of Basel IV is to clarify the way banks calculate Risk Weighted Assets (RWAs). By using internal models, banks’ calculation of RWAs should not fall below 72.5% of the calculation (using standardized models). This lower limit is known as the “output floor” (Source).

Key Challenges with Basel IV Compliance

Financial institutions face a variety of challenges when complying with the latest BCBS Basel IV regulations due to their fragmented infrastructure and data quality Most banks have a very complex IT landscape to support a multitude of products and services, global regulatory regimes, and diversity of clients, counterparties, and other external groups (exchanges, custodians, market data providers, etc). Compliance remains a challenge in an environment where there is an immense focus on cost reduction.

Using existing static metadata tools, enterprises are unable to monitor data quality throughout its lifecycle. Data is currently measured and reconciled within individual siloed systems, applications, or workflows instead of across the end-to-end landscape. Each of these data sources consists of scattered, outdated, and duplicate records. The lack of E2E data quality quickly trickles down throughout the enterprise affecting Basel IV compliance. Additionally, the siloed enterprise landscape creates difficulties in producing certain required calculations (such as the leverage ratio %) that span across an enterprise’s businesses, systems, applications, and workflows.

The journey to achieving full compliance remains a challenge until there is a strong focus on data quality, interoperability between the systems (both legacy and fintech products), and full traceability over lifecycle events. By improving these obstacles, banks have a stronger foundation for effective and sustainable Basel IV compliance.

Effective Data Governance for Basel IV Compliance

Data Quality
Currently, many financial firms struggle with enterprise-wide data quality. An effective data management model implements processes and rules to ensure that poor data quality is identified and addressed appropriately on an ongoing basis throughout the enterprise. According to industry evidence, accuracy in RWA calculations could be improved with better data quality. Overall, banks require high-quality data to meet timely risk assessments and Basel IV reporting requirements.

Banks have very complex IT architectures that require seamless connectivity between a multitude of databases, applications, and external data sources. The lack of messaging standardization between the various parties creates additional complexity in the banks ability to assimilate data from the various sources prior to performing the very complex calculations that Basel IV requires. An effective mechanism of digesting and normalizing the various sources of data, coupled with the ability to connect the relevant attributes (event lineage), will lay a solid foundation to support Basel IV compliance.

Regulators have also responded to the BCBS 239 recommendations and have strengthened their teams and capabilities. They are more proactive and now request banks to “prove” details on certain submissions. This requires banks to have appropriate tools that prove end-to-end (E2E) traceability of all data attributes. This is not easy for banks that suffer from data quality and interoperability issues. Given the scope of sanctions and fines imposed on financial institutions in recent years, the cost of achieving full compliance is a priority for most banks. The cost of the right solution will be only a fraction of the potential penalty for non-compliance.

PeerNova’s Cuneiform Platform: Active Data Governance

PeerNova’s Cuneiform Platform is an active data governance and data quality tool that supports and accelerates Basel IV compliance.

The solution enables E2E trust and transparency of data and business flows. To ensure ongoing data quality needed for compliance, Data Quality and Timeliness Rules are perpetually run on live data. The platform’s E2E lineages identify data quality and process issues, addressing and resolving them quickly. With continuous data quality checks, the platform identifies and addresses quality and process issues as data is received, in parallel with other processing systems. Firms are able to have confidence in the data they are sending to regulators.

The Cuneiform Platform provides an agile architecture that supports Basel IV’s regulatory reporting requirements. The solution seamlessly integrates and interoperates with existing tools, applications, and infrastructure, which allows for quick deployment and flexible implementation. It also combines existing data management and governance tools with additional capabilities to automate regulatory and risk reporting through a self-serve model (reducing cost and increasing efficiency).

PeerNova’s Cuneiform Platform offers E2E visibility by providing a unified view of data’s lineage and traceability. The solution provides the ability for all processes, workflows, and expertise to be captured as part of its active E2E lineages, resulting in faster root-cause analysis.

With ongoing reforms and frameworks implemented by BCBS and other regulatory bodies, banks must be nimble and quick to implement an active data governance framework to meet today’s evolving regulatory requirements.

To learn more about how PeerNova’s Cuneiform Platform can help your enterprise meet BCBS 239’s regulatory requirements, be sure to get in touch with us and request a demo today.

“History of the Basel Committee.” The Bank for International Settlements, 9 Oct. 2014. Link
“Basel IV: What’s Next For Banks.” McKinsey. Link
“What Is Basel IV? What Is Basel IV?.” DB. Link

By Sonia Chopra

Sonia Chopra is PeerNova's Product Marketing Manager for the Valuation Risk product line. She has nearly a decade of marketing experience and has been with PeerNova for eight years. She specializes in crafting content and campaigns that address the complexities of product and valuation control, such as market volatility, asset pricing discrepancies, and regulatory compliance issues. Her ability to articulate the intricacies of these challenges, enables her to develop highly effective product marketing strategies that meet the evolving needs of the industry.

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