Basel III is intended to stabilize the entire banking industry. However, the burden of compliance is falling much more heavily on smaller banks.
Basel III will heavily alter day-to-day decisions around funding, credit, capital, liquidity and operations for every bank in the country. To that end, large, multinational banks have taken considerable steps in their implementation plans for Basel III. Many smaller banks, on the other hand, are swamped by other market, regulatory, resourcing and competitive pressures, and remain at much earlier stages of preparation. The difficulty for these banks is not necessarily compliance; after all, given the universal compliance obligation, every bank is theoretically in the same boat. One of the biggest problems is the lack of clarity, with some details of the requirements still being debated, thus creating uncertainty and complexity for banks who can’t afford to prepare for any conclusion.
The issue is that Basel III is effectively a one size fits all policy. Its implementation and operational burdens were set for larger banks, making compliance much harder for banks that lack technical and human resource capacity due to size. This is particularly frustrating to many banks because they generally pose less risk to the financial system than their larger peers. So while many do not object to comparable standards in capital and liquidity requirements, the disproportionate increase in the operational burden represents an issue.
To overcome this, regional and domestic banks need to become more nimble and efficient. This will not only alleviate some of the operational burden, but also will create operational and strategic advantages, making it easier to respond to regulatory change over time.
Many larger banks, for example, struggle with large and often fragmented treasury technology infrastructure, which has a variety of legacy systems and integration touchpoints. While smaller banks are just as likely to experience this challenge, their ability to replace such technology with a single, integrated system across asset classes and treasury activities is far greater. This, in turn, increases transparency over funding and liquidity. It also supports efficient, cohesive processes, controls and integration.
Smaller banks that make these changes can use Basel III as an opportunity to become more competitive, better equipped to face new business challenges as they emerge and more responsive to regulatory change.
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