Risk Basel Methodology Implementation

Basel will have significant impact on the banking sector. One recent study1 estimated that as the Basel rules are written today; by 2019 the US banks will need about $870 billion of additional Tier 1 capital, $800 billion of short-term liquidity, and about $3.2 trillion of long-term funding, absent any mitigating actions.

Closing these gaps will have a substantial impact on profitability. Just the implementation of Basel program in a mid-sized bank is likely to cost $65 to $100 Mn, mainly driven by IT. Bulk of this cost (65-70%) is to be spent in ensuring data consistency and availability, developing applications and designing new IT landscape. As a result, getting the Basel implementation right, the first time itself, is super critical. 

One key component of the implementation is getting Basel models methodology right – methodology that is not only compliant with the regulatory guidelines but also aligned to business needs. This paper covers the critical aspects of the methodology where the devil is in the details and which warrants great attention.