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17. 11. 2020

Basel IV Technology Implementation Roadmap for Small and Medium Sized Banks

Basel IV Technology Implementation Roadmap for Small and Medium Sized Banks (13.3mb)

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Many Canadian banks are already anticipating significant challenges as they start to gear up for the implementation of the Final Set of Basel III Reforms (commonly referred to as Basel IV) on January 1, 2023. While the Big Banks have some experience in Basel compliance, federally regulated Small and Medium Sized Banks (SMSBs) have found themselves in unchartered waters. For the first time, the Basel Reforms introduces the concept of “proportionality”, bringing SMSBs into fold of the Basel framework, while keeping the regulatory requirements in line with the size and model of their businesses.

There are 63 federally regulated SMSBs in Canada, and based on the size and complexity of their business models, OSFI has segmented them into 3 categories: Category I – Medium-sized institutions with over $10 billion in assets, Category II – Small lenders with less than $10 billion in assets and total loans of greater than $100 million, and Category III – Non-lenders with assets under $10 billion and total loans of less than $100 million. The proposed approaches for risk calculations vary for each category.

SMSBs are only required to implement Pillar 1 of the Basel IV framework, namely Capital Adequacy Requirements (CAR) guidelines, Leverage Requirements (LR) guidelines, and Liquidity Adequacy Requirements (LAR) guidelines. Approaches for Market Risk, Interest Rate Risk and Step-in Risk are not applicable to SMSBs.

The interpretation of the OSFI requirements and understanding the applicable regulations will undoubtedly be the most important step for SMSBs. Implementation of the regulations will necessitate changes to operational systems, data, and reporting, owing to the sheer volume and complexity of the calculations that banks must undertake.

While our first article Building for the Future with Basel IV delved into the Basel IV requirements and broad technological impact for all banks, this article narrows down on the specific impact on SMSBs. It provides a detailed roadmap to guide SMSBs through the implementation process, particularly, in terms of assessing and addressing the technology gap. In this article, we offer a systematic approach that smaller financial institutions can take to plan, design, develop, and deploy a solution architecture that will support the Basel IV calculations and reporting requirements, and allow them to generate timely, quality reports for both their internal management and for submissions to OSFI. The roadmap covers everything from designing the target architecture, building data models, profiling source system data, comprehensive data mapping, building workflows, risk engines, and having in place a governance framework for trusted analytics and reporting.

Adastra has over 20 years of industry experience and our experts have worked closely with banks of all sizes to build and deploy custom solutions for the financial industry. Adastra can help banks develop and implement a Basel IV solution that fits their needs as well as the regulatory requirements and can potentially be scaled to support future evolutions of the Basel Reforms.

Register for our upcoming webinar on 'Building for the Future with Basel IV'


Author

Ilia Bolotine

Ilia Bolotine

SVP Financial Services & Head, Adastra Business Consulting (Canada)