Tackling the Basel III SCRA data challenge

Fitch Solutions examines how a more granular and sensitive approach to credit risk under 2023 Basel III updates will increase the quality of counterparty assessments, but create additional compliance costs for banks

The final Basel III framework will create a more granular approach to credit risk management. More specifically, from 2023, a change to how risk weights are calculated will mean banks must collect new data on any unrated banks in their portfolios, as well as information from their jurisdictional regulators.

Under the new standardised credit risk assessment (SCRA) approach to calculating risk weightings, banks will be required to collect detailed information to measure the minimum capital requirements and buffers of these unrated banks against the relevant jurisdictional requirements. 

One of the main challenges for banks contemplating the SCRA approach is the lack of structured data available to satisfy the risk capital calculation and reporting requirements. Data must be collected in two areas: the capital adequacy status for counterparty banks and the minimum requirements for banks as set by their own jurisdictional regulators. 

“You cannot go to a website and simply click ‘download’ to get all this information,” explains Kutlu Yucel, head of capital management at Turkish bank Yapı Kredi. “You need to access the bank’s annual report and look through it for the details – there is no standard format. Also, you need to find the specific country’s minimum requirements. On top of that, you need to do your own due diligence and make your own assessment.”

The benefits [of accurate SCRA data] will be related to the greater alignment between risk and regulatory capital

A senior risk infrastructure professional at a large Latin American bank

The task of time management

For a bank such as Yapı Kredi, which has a portfolio of unrated bank counterparties spanning 20–30 different countries, this is a daunting task. As such, time management is the other major challenge for banks. In March 2020, the Basel Committee on Banking Supervision announced implementation would be delayed by a year to 2023 to account for disruption caused by the Covid‑19 pandemic. However, banks must act now to establish and test the necessary systems and processes. For example, Yucel is factoring in a year for testing Yapı Kredi’s tools and resources for SCRA data management.

“As well as establishing the necessary systems and processes, we need to train other people in the bank,” he explains. “The current regulation is well understood, but we have had a lot of time to get to this point with those rules. We aren’t starting all over again, but we need to explain to our colleagues what is changing, how we are going to take the next step and what it will mean. This will take some time and effort.”

For most banks, the wider internal impact will be felt in cost-of-capital calculations. In fact, accurate SCRA data could lead to a reduction for many organisations. It could also help banks create more nuanced pricing structures. “The benefits will be related to the greater alignment between risk and regulatory capital,” says a senior risk infrastructure professional at a large Latin American bank.

As such, SCRA data could be used to underpin decisions on counterparty choice and prices offered for different regions – banks can choose to work with customers with a better risk rating, rather than high capital consumption counterparties. 

“Currently, one standard risk weight is assigned to all unrated banks, without reference to the health or quality of the bank,” Yucel explains. “With this new regulation, there is a chance to differentiate risk weights based on capital adequacy – or the health of the bank.” While this is unlikely to be the main deciding factor for most banks, it could support a more nuanced approach to pricing. 

You cannot go to a website and simply click ‘download’ to get all this information … You need to access the bank’s annual report and look through it for the details – there is no standard format. Also, you need to find the specific country’s minimum requirements. On top of that, you need to do your own due diligence and make your own assessment

Kutlu Yucel, Yapı Kredi

The data challenge

For many banks, therefore, creating a robust system to collect and process this data in a timely and accurate way could benefit the bottom line. As such, opting to build this capability in-house or buy an off-the-shelf tool or data feed from a vendor will be an important decision.

For most banks this will involve a cost-benefit analysis, which will form part of the wider decision-making process around how to solve this data challenge. The Latin American bank respondent has already set up a plan “to assess the possibilities for adhering to the standard, since we do not have all the information internally”. It hopes to find “an automated [data] solution that is easily integrated into our systems, reducing the operational risk of this dependency”.

Yapı Kredi is going through a similar process. For Yucel, if the bank decides to go with an external vendor, trust, dependability and experience will be major considerations when assessing providers. He adds: “In the end, the decision will be based on the vendor’s reputation in the industry.”

This sentiment will almost certainly apply across the industry as banks look for a reliable way to gather and manage the data needed for SCRA compliance in an accurate and cost-effective way.

Download the full Basel III – SCRA data briefing paper

Download this briefing paper to learn more about the compliance and data challenges involved, and why your firm needs to start preparations now

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