Basel III misses opportunity to break down the silo culture in banking - Algorithmics questions the missing link between capital and liquidity

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Algorithmics, the world's leading provider of risk solutions, today publishes the first comprehensive assessment of all the elements of Basel III, and finds them lacking in their conceptual approach to capital and liquidity.

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A truly effective risk management system will take a holistic approach to risk measurement and reporting; viewing and managing the interconnections between all risk factors, such that their potential impact on the balance sheet and stakeholders’ interests can be properly accounted for.

Algorithmics, the world's leading provider of risk solutions, today publishes the first comprehensive assessment of all the elements of Basel III, and finds them lacking in their conceptual approach to capital and liquidity.

The raft of proposals from the Basel Committee includes the headline-grabbing tier 1 capital ratio, buffer building, and leverage and liquidity ratios, which are all significant in their own right. However, having assessed all the regulatory documents from a holistic rather than risk silo perspective, Algorithmics’ research paper, titled ‘Basel III: What’s New? – Business and Technological Challenges’, identifies the fundamental flaw of failing to reflect the true relationship between liquidity and capital.

One of the report’s authors, Dr Mario Onorato, Head of Balance Sheet & Capital Management at Algorithmics, and Honorary Senior Lecturer, Cass Business School in London, says, “Continuing to view capital as a primary mitigant of liquidity risk fails to recognise the complete nature of liquidity risk. Should a liquidity situation arise and the bank uses reserves set aside to absorb losses and meet obligations, the value of the company and of the capital are also likely to decline, because the bank will begin to be perceived as ‘riskier’. Liquidity risk and capital are therefore inextricably linked and cannot be addressed as separate silos.”

Basel III goes only part way to addressing the weaknesses of the established silo-based approach to risk management. The compartmentalized, prescriptive nature of the liquidity coverage ratio and net stable funding ratio within Basel III is unhelpful because it does not reflect the capital-liquidity interplay. This summer’s European Bank stress tests did not touch on liquidity, the very thing that crippled the markets during the recent crisis. The avoidance of a repeat occurrence is a key Basel III objective.

Regardless of regulatory gaps, Dr Onorato suggests stakeholders’ demands for better governance will result in banks amending their risk processes and systems in order to view risk holistically for all their legal entities, from both a bottom up and top down perspective.

“A truly effective risk management system will take a holistic approach to risk measurement and reporting; viewing and managing the interconnections between all risk factors, such that their potential impact on the balance sheet and stakeholders’ interests can be properly accounted for.” says Dr Onorato

To download a copy of Algorithmics' Basel III research paper, ‘Basel III: What’s New? – Business and Technological Challenges’, visit: http://www.algorithmics.com/EN/media/pdfs/Algo-WP0910-LR-Basel3-Exd.pdf

For more information about Algorithmics' award winning and patented solutions, visit: http://www.algorithmics.com

For further information please contact:

Heather Smith, Senior Communications Manager, Algorithmics (UK) Ltd
Direct line +44 (0) 20 7392 5820 Mobile +44 (0) 7515 974223
E-mail Heather(dot)smith(at)algorithmics(dot)com

Notes to Editors:

A media summary of the full research paper is available. Liquidity Risk – An oversight by the Basel Overseers is a summary and explanation of the findings from the research paper. It can be found at: http://www.algorithmics.com/EN/media/pdfs/Algo-WP0910-LR-Basel3.pdf

Algorithmics is the world's leading provider of risk solutions. Financial organizations from around the world use Algorithmics' software, analytics and advisory services to help them make risk-aware business decisions, maximize shareholder value, and meet regulatory requirements. Supported by a global team of risk experts based in all major financial centers, Algorithmics offers proven, award-winning solutions for market, credit and operational risk, as well as collateral and capital management. Algorithmics is a member of the Fitch Group. http://www.algorithmics.com

‘Basel III: What’s New? – Business and Technological Challenges’ is a research paper to help practitioners fully understand all elements of the Basel III proposals, their impact on business, operations and technology needs, and gaps the between the regulations and best practice risk governance. It can be found at: http://www.algorithmics.com/EN/media/pdfs/Algo-WP0910-LR-Basel3-Exd.pdf

Fitch Group is the parent company of Fitch Ratings, a global ratings agency committed to providing the world's markets with independent, timely and prospective credit opinions. With 49 offices worldwide, Fitch Ratings’ global expertise spans across capital markets in over 150 countries. Fitch Ratings is headquartered in New York and London.

The Fitch Group also includes Fitch Solutions, a distribution channel for Fitch Ratings products and a provider of data, analytics and related services; and Algorithmics, the world's leading provider of enterprise risk solutions.

The Fitch Group is a majority-owned subsidiary of Fimalac, S.A., headquartered in Paris, France.
For additional information, please visit http://www.fitchratings.com http://www.algorithmics.com and http://www.fimalac.com

© 2010 Algorithmics Software LLC. All rights reserved. ALGO, ALGORITHMICS, Ai & design, ALGORITHMICS & Ai & design, KNOW YOUR RISK, MARK-TO-FUTURE, RISKWATCH, ALGO ALM, ALGO COLLATERAL, ALGO CREDIT ADMINISTRATOR, ALGO CREDIT DATA SERVICES, ALGO CREDIT ECONOMIC CAPITAL, ALGO CREDIT EXPOSURE, ALGO CREDIT LIMITS, ALGO CREDIT REGULATORY CAPITAL, ALGO CREDITVANTAGE, ALGO ETREASURY CREDIT, ALGO FIRST, FIRST 500, ALGO MARKET ANALYTICS, ALGO OPDATA, ALGO OPVAR, ALGO RECONCILIATION, ALGO RISK, ALGO RISK SERVICE, and ALGO SUITE are trademarks of Algorithmics Trademarks LLC.

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Algorithmics
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