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That's Basel with an ?E? ? As in ?Enterprise? ? World Leasing News

That?s Basel with an ?E? ? As in ?Enterprise?

By Andrew Lea, Sr. Marketing Manager, Linedata Capitalstream.

Putting Lessor Front Office Tools On The Front Line In The New Regulatory Environment

In January of this year, The Basel Committee on Banking Supervision issued its Principles for effective risk data aggregation and risk reporting.? In its announcement of the publication of the document, the committee noted that ?The financial crisis that began in 2007 revealed that many banks were unable to aggregate risk exposures and identify concentrations fully, quickly and accurately?.. The principles published today are intended to strengthen banks? risk data aggregation capabilities and internal risk reporting practices.?

Thus began a new phase of the evolving international regulatory framework of the Basel Accords. What had begun in February 1975 as an effort to respond to one Gernam bank?s crisis has grown into an international institution, setting standards for risk, capital adequacy, transparency, and ? with this recent announcement ? for risk-related data aggregation and reporting requirements for the largest banks around the globe.

The need for improved risk management had always been a central theme of the Accords. For years, the Basel Committee had focused on safeguards to address risk issues and ensure capital adequacy. As early as the 1980s, there was concern that the capital ratios of the main international banks were deteriorating at the same time that sovereign debt ratios were rising. It soon became clear that the available information about banks? credit, market, currency, and other kinds of risk was insufficient and unreliable.

The Basel group responded by broadening the scope of banking activities to be governed, seeking to unlock the risk-related secrets hidden in off-balance sheet transactions, in complex derivative instrument trading, and in the systemic risk implications of mega-banks trading freely on their own accounts. In the aftermath of the 2007- 2008 financial crisis, the scope of the Accords was widened again to prevent banks from becoming too big to fail, requiring them to monitor their ability to survive a crisis, and requiring them to develop a plan for their own ?resolution? should it be necessary for them to be dismembered, acquired, or merged in order to protect the broader financial system from destabilization.

Additionally, the specter of financial meltdown spurred the US federal government to amend its own regulatory framework with the adoption of the Dodd?Frank Wall Street Reform and Consumer Protection Act. The Dodd-Frank Wall Street Reform and Consumer Protection Act makes recommendations to the Federal Reserve for increasingly strict rules for capital, leverage, liquidity, risk management and other requirements as companies grow in size and complexity, with significant requirements on companies that pose risks to the financial system.? It institutionalized the ?Volcker Rule?, aimed at reducing the amount of speculative investments on large banks? balance sheets and enhancing capital adequacy rules with countercyclical variations in mandated debt ratios, requiring that retained capital be increased in times of economic expansion and decreased in times of economic contraction.

Taken as a whole, the preponderance of regulations and restrictions mandated by both Basel and Dodd-Frank address banking and investing practices of regulated institutions and the reporting that must be provided to support adequate supervision. But with the January 2013 announcement, the Basel committee turned the spotlight on banks? risk data aggregation capabilities and risk reporting practices, focusing on the adequacy of a bank?s capabilities to provide high-quality and comprehensive data, both to regulators as well as for its own risk due diligence.

As a result, credit risk management and reporting capabilities are now criteria for rating a bank?s operational risk management. Accordingly, the adequacy of its risk management infrastructure and practices may well impact an institution?s capital adequacy requirements under the Basel framework.

Some interesting new dots are being connected ? the new emphasis on adequate data collection, monitoring, and analysis means that risk-related transactions impact the bank?s compliance and capital adequacy on multiple scales: How does a risk-weighted asset contribute to the bank?s capital adequacy requirements? Is it a relatively low-weighted asset, such as an asset-backed lease?? And, if so, how should the low cost of reserves impact the pricing of the product? How does the deal impact asset-type concentration restrictions and related covenants? These are the kinds of credit-risk-related impacts on capital adequacy requirements that risk-aware lenders and lessors have learned to live with.

But now an added layer of questions are coming to the fore: How adequate is the risk-related information generated over the lifecycle of the transaction for meeting enterprise data aggregation and reporting requirements? It may be safe to assume that the product team knows what information it needs to collect and track to facilitate its originate? / adjudicate / price / document / fund / fulfill / book / bill / collect / service and sell lifecycle. But how well do those data fulfill the requirements for institution-wide risk management and transparency?

The evolving regulatory environment is adding new criteria for determining the adequacy of data. No longer do facilitating the acquisition and retention of customers, supporting customer service, and feeding the corporate GL comprise an adequate job description for the leasing team?s data. Increasingly, each line of business will need to deliver the information required to support enterprise risk management and meet reporting requirements as well. And if this is the scope of each LOB?s tracking and reporting requirements, then so too will meeting these needs be key expectations of the solutions that are implemented to facilitate and automate those operations. Indeed, the ability of a solution to rationalize and deliver accurate and sufficiently comprehensive risk-related information may be as critical as its ability to streamline and support operations and customer service.

These technologies and processes are not new ? data management and analytics have been a priority on Wall Street for years, if not decades,? comments Greg MacSweeney of Wall Street Technology. ?When it comes to Dodd-Frank, however, the trick will be to refine the tools and processes that a firm already has and make them work for compliance.?

Not only will data warehousing, core systems and risk analytics, as well as maintaining clean, consistent data be increasingly important, but so will be ability of line of business-specific tools to support these deliverables. Like the risk-related datasets, the applications that facilitate operations, too, will need to facilitate enterprise-wide data rationalization and availability.

This will create a challenging bind for those ?best-of-breed? niche solutions that serve a particular line of business or a particular stage of the application management or contract lifecycle. For example, the ROI numbers for buying a stand-alone originations platform that serves only the equipment leasing team will need to account for the added burden of downstream rationalizing and integration of data from similar applications used for commercial lending or commercial real estate credit or retail lending, etc. Similarly, pricing engines will enjoy significant advantage if they can account for the impact of each newly-booked asset on enterprise capital adequacy requirements; the ability to provide risk-weighted pricing will be seen as a core capability whose absence will undermine capital optimization.

Clearly, for larger institutions at first, buying criteria will increasingly favor solutions that span multiple lines of business ? with a single data scheme and database ? and that support enterprise-wide risk intelligence and regulatory compliance. ?We have automated silos of information and processes,? observes one data quality expert, ??.but most of the time, they are defined uniquely to a given departmental line of business. Information tends to be produced in one part of the business, but used in another part, usually downstream. So we have to reorient the organization to a horizontal, value-chain view.?

We know that change is a constant, but we are entering an era when the rate of change is more variable than ever. For operational and C-level managers, risk managers, and solutions producers alike, the trends all point toward de-silo-ing, increased data-sharing, and, ultimately, better collaboration and greater agility.

Source: http://www.worldleasingnews.com/articles/thats-basel-with-an-e-as-in-enterprise/

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