The implementation of Basel III creates a new set of challenges for the financial industry. Customer types, relationship types, channel types and many more will need to be categorised. A possible solution to these challenges is accurate and versatile data. Damian Young writes
Basel III is having and will have a profound impact on bank operations — from reporting requirements and balance-sheet management to customer pricing and lending capacity.
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The positive changes that Basel III will make to the finance world are more than welcome for banks and customers alike, but the road to achieving change effectively will have its challenges.
In a nutshell Basel III is designed to improve banks’ ability to absorb shocks, improve risk management and governance of balance sheets and to improve banks’ transparency. These new measures will change capital requirements for banks, introduce new liquidity and funding measures, and implement new leverage ratios.
The two new ratios, Liquidity Coverage Ratio (LCR) and the Stable Funding Ratio (NSFR) that measure short-term and long-term resilience respectively will be implemented gradually to avoid a shock to the system in the guise of harming economic growth through reduced lending and funding issues.
Answering Basel III means that customer types, relationship types, channel types etc. will need to be categorized resulting in a new set of challenges for deposits managers and treasury managers. To answer these challenges having accurate but versatile data is essential.
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By GlobalDataHow prepared are we for Basel III?
In 2014, Nomis Solutions completed an audit of 40 senior retail bankers from Europe and the Middle East where we found that only 8% felt that they were "highly prepared" for pricing differentials as a result of Basel III. Highly prepared would mean that these banks had fully embedded Basel III metrics in funds transfer or customer pricing, of the remaining 92%, 9% said they had little or no preparations at all, 50% had some preparations, and the remaining 41% said they were prepared but not fully embedded.
Three key strategies for deposits under Basel III
The impact of Basel III is highly likely to be acute on strategies for deposits. A greater focus will be placed on gathering retail-type deposits to provide a sustainable base on which to lend and as the markets begin to pick up, and lending returns to normal levels it will be essential that banks are positioned to take advantage of this. We feel that the following three strategies will help banks to have the capacity to lend and thrive in this environment.
Pricing strategies
Basel III means that deposits will now see a complex segmentation that will determine their true value to the bank. Pricing such segments will differ significantly with non-retail-type deposits being less attractive for banks.
Given that non-retail sources will attract higher outflow costs and lower stability measures, the deposits book of a bank should be managed holistically, reducing the costs in non-retail segments and increasing the growth and focus of retail deposits. Banks must approach pricing for all segments in a data-driven manner to fully factor in costs in FTP, or use customer pricing to maintain margin control. Categorisation and calculation of LCR/NSFR in deposits portfolios must be done in a dynamic fashion and lead to appropriate pricing strategies fitting with bank balance sheet and P&L strategies.
Product Strategies
Product pricing strategies will enable banks to maintain margins through reflecting the costs of LCR outflows and/or stable funding value. Developing and/ or changing products may assist in establishing this differentiated pricing structure within portfolios and many banks are approaching product strategies and realignment in light of Basel III in stages on their overall customer deposits book:
- Reduce LCR and increase stability for non-retail balances;
- Move retail balances from higher outflow and lower stability with due reference to cost, and
- Grow retail balances in overall portfolio mix
The result is more stable balances and reduced costs.
Enhancing or changing the product mix in the non-retail segments first — followed by retail segments and a growth strategy for retail customers — will lead to lower total outflows and higher stability overall.
Data-driven market strategies
In our experience, gathering and using this data to drive specific strategies is largely underdeveloped. Most banks have a significant repository of customer, account, behavioural, and market data that can help them determine appropriate methods of product categorisation, pricing execution, and market opportunities.
Using data analytics to support the development of business strategies must be supported by deploying the right internal and external market strategy. Data-driven reporting, business intelligence, and performance metrics are key components and drivers of such strategies. It is our experience that many banks lack the requisite portfolio view of their deposits and as a result do not have the key insights they need to drive strategies.
As new Basel measures become more critical in the business, deposits portfolios must have the appropriate Basel III segments, calculations, and categorisations within their reporting. The implementation of Basel III measures in the business needs to be embedded in the strategy of the business as well as the treasury function.
Damian Young is the director of Banking EMEA at Nomis Solutions
