Optimizing the Capital Ratio under Basel III

Basel III stresses the integration between liquidity and credit risk, and the need to manage both from an enterprise-wide risk-management context. This demands a new enterprise-wide organization of tasks, processes, and calculation infrastructure, specifically in terms of systems integration, data flow coordination, model validation, and data interfacing. Under Basel III, analysis of eligible capital and deductions are fully embedded during the risk weighted asset calculation, which represents a significant change from Basel II. The calculation of tier capital, the allocation of deductions, and the optimization of risk weighted assets can no longer be performed in isolation. A holistic, enterprise-wide view should be in place to efficiently address them and coordinate the perspectives of finance, risk management and capital planning. Finally, Basel III provides a strong incentive for further integration of data management and analytics into an enterprise-wide risk management platform. Banks that integrate data across the enterprise will reduce costs, improve efficiency, automate capital ratio calculation, and optimize the calculation of its components (risk weighted assets and tier capital). This paper analyzes the key challenges institutions face when optimizing the capital ratio calculation and outlines ways they can overcome these challenges.