Proceedings of the Australia-Middle East Conference on Business and Social Sciences 2016, Dubai

(in partnership with The Journal of Developing Areas, Tennessee State University, USA)
ISBN 978-0-9925622-3-6

BASEL III- IMPLEMENTATION IN AND CHALLENGES

FOR BANGLADESH
Belal Uddin Ahmed
University of South Australia, Australia

ABSTRACT
This conceptual paper discusses the aspects of Basel III implementation in and its challenges for Bangladesh. It also
discusses the strategies to improving the risk architecture in line with Basel III framework. The study reveals that
Basel III does really provide mechanisms for improved risk management systems in banks elsewhere, including in
Bangladesh. The reason primarily lies in its simplicity. For example, Basel III introduces a simple, transparent, non-
risk-based regulatory Leverage Ratio to constrain leverage in the banking sector and supplement risk-based capital
ratio as a safeguard against model risk. The study also reveals that though risk capital may be the necessary safety
cushion for banks in Bangladesh, capital alone may not be sufficient to protect them from any extreme unexpected
loss events. This is because risk capital will remain only a number and may not be effective if banks do not assess
their risk periodically and take timely corrective action when the risk exceeds the threshold limit. Thus, the study
suggests that whether it is Basel II or Basel III, it is crucial that a bank does not depend solely on "regulatory
capital". What is needed here is a dynamic risk mitigation strategy, where all employees act as risk managers in their
own area.The study further suggests that it is important that banks in Bangladesh have the cushion afforded by these
risk management systems to withstand shocks from external systems, especially as they deepen their links with the
global financial system going forward.

Key words: Basel III; Implementation; Challenges; Bangladesh

Corresponding author’s e-mail:belal.m359@gmail.com

INTRODUCTION

Basel III is an evolution rather than a revolution for many banks. It was developed from the existing Basel II
framework, and the most significant differences for banks are the introduction of liquidity and leverage ratios, and
enhanced minimum capital requirements. Bangladesh has entered into the Basel III regime effective from January
01, 2015. Bangladesh Bank (BB) amended its capital standard which was based on Basel II and circulated new
regulatory capital and liquidity guidelines in line with Basel III of BIS. The new capital and liquidity standards have
great implications for banks. Let us focus the guideline of the BB and identify the challenges ahead for the banks of
Bangladesh.The discussion may be started from original Basel III accord of the BIS, which is the base of the BB's
guideline. Basel III was introduced in 2010 with the intention of gradual implementation starting from January 01,
2013 and full implementation starting from January 01, 2019. Basel II guideline, the previous version of capital
standard, was felt inadequate to maintain financial stability during global financial crisis started in 2007.

However, the financial instability took a heavy toll and led to economic crisis in various countries. Basel III
guideline has been formulated to improve shock resilience capacity of the banks to prevent recurrence of such
financial and economic crisis.Basel III has identified the reasons of bank failure in recent crisis. The main reasons of
the crisis, as identified in the Basel III document, are use of excessive leverage, gradual erosion of level and quality
of capital base, insufficient liquidity buffer, pro-cyclicality and excessive interconnectedness among systematically
important institutions. Let us have a look at how these factors have contributed to the financial crisis and what are
the measures suggested by Basel III to defuse the threats.

Moreover, Basel III framework was basically the response of the global banking regulators to deal with the factors,
more specifically those relating to the banking system that led to the global economic crisis. The framework of Basel
III sought to increase the capital and improve the quality thereof to enhance the loss absorption capacity and
resilience of the banks, brought in a leverage ratio to contain balance sheet expansion in relation to capital,
introduced measures to ensure sound liquidity risk management framework in the form of liquidity coverage ratio
(LCR) and net stable funding ratio (NSFR), modified provisioning norms and of course enhanced disclosure
requirements.

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(in partnership with The Journal of Developing Areas, Tennessee State University, USA)
ISBN 978-0-9925622-3-6
WHY SHOULD BANGLADESH SHOULD ADOPT BASEL III?

The discussion may be started from original Basel III accord of the BIS, which is the base of the BB's guideline.
Basel III was introduced in 2010 with the intention of gradual implementation starting from January 01, 2013 and
full implementation starting from January 01, 2019. Basel II guideline, the previous version of capital standard, was
felt inadequate to maintain financial stability during global financial crisis started in 2007. The financial instability
took a heavy toll and led to economic crisis in various countries. Basel III guideline has been formulated to improve
shock resilience capacity of the banks to prevent recurrence of such financial and economic crisis. In fact,
Bangladesh should implement Basel III because of several reasons. By far the most important reason is that as
Bangladesh Banks go abroad and foreign banks come on to our shores, we cannot afford to have a regulatory
deviation from global standards. The “perception” of a lower standard regulatory regime will put Bangladeshi banks
at a disadvantage in global competition, especially because the implementation of Basel III is subject to a “peer
group” review whose findings will be in the publicdomain. Deviation from Basel III will also hurt us in actual
practice. We have to recognize that Basel III provides for improved risk management systems in banks. It is
important that Bangladeshi banks have the cushion afforded by these risk management systems to withstand shocks
from external systems, especially as they deepen their links with the global financial system going forward.

WHAT WOULD BE THE IMPACT OF BASEL III ON BANKS AND FINANCIAL SYSTEM?

Capital
Capital requirements are also a part of Basel III. Banks are required to hold 4.5% of risk-weighted assets in the form
of their own equity. This rule is an effort to make banks have skin in the game when it comes to making decisions to
reduce the agency problem. More capital rules include 6% of risk-weighted assets being of Tier 1 quality. Risk-
weighted assets are the most vulnerable during a downturn, so these rules will protect the banks.

Liquidity ratios
Another element of Basel III is required liquidity ratios. The liquidity coverage ratio mandates that banks must hold
high-quality, liquid assets that would cover the bank's cash outflows for a minimum of 30 days in the event of an
emergency. The net stable funding requirement is for banks to have enough funding to last for a whole year in an
emergency.

Impact on business segments

No assessment of the impact of Basel III would be complete without a review of the effect on profitability of
individual businesses and the bank as a whole. As suggested in our April 2010 white paper, three types of impact
must be considered:

Balance-sheet-specific impact at the corporate level

Balance Sheet Specific impact at the corporate level cannot be attributed to individual businesses. Examples include
those capital deductions that will affect each bank’s balance sheet differently, depending on its assets, but will not
have a particular effect on businesses.

Universal impact across all banks and businesses

The new capital and leverage ratios are the best examples of rules that affect all businesses proportionally. The
impact would be more pressing on marginally profitable businesses, but all businesses would suffer unless the cost
rise could be passed on to customers.

Business-specific impact
This category includes rules on risk-weighted assets (RWAs), liquidity, and long-term-funding, which were
designed specifically to address the risks that were visible during the crisis, for example, in trading and
securitization

Shadow Banking
Excessive leverage i.e. use of non-equity fund has played major role in both initiation and deepening of the crisis.
The initiation of the crisis was in shadow banking system of the USA. The shadow banking system is a set of
institutions that carry out functions very similar to those of traditional banks but that are less regulated. They are
kept less regulated because they do not receive deposit from the public. How do they provide bank-like services

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(in partnership with The Journal of Developing Areas, Tennessee State University, USA)
ISBN 978-0-9925622-3-6
without accepting deposit? Let us explain it with a simplified example.Suppose that an investor availed margin loan
from a broker to purchase a security. The security is kept pledged to the broker against the margin loan. The broker
can use the pledged security to enter into a repo (repurchase agreement) transaction with a pension fund which have
excess fund to invest for a short period. The pension fund can deposit the excess fund in a bank but the return of
such short-term deposit is not attractive. So, pension fund searches for alternative profitable avenues for investment
with equal importance on safety of the fund. If it enters into repo transaction with the broker, it will be able to invest
its short-term fund more profitably that is secured by repo security. In this case, the pension fund is called repo
lender, the broker is called repo borrower and the security of the repo transaction is called collateral. Thus, a bank-
like transaction is made in the shadow banking system and leverage is created contracts in the period prior to the
financial crisis. The asset size of shadow banking system in the USA was even higher than the formal banking
system at that period. Mortgage Backed Securities (MBS) were popularly used as repo collateral in these
transactions. MBS are created by pooling mortgage loans and selling them as security. The sale of mortgage loan
increases the availability of fund for extending further loan. The demand of MBS as repo collateral in pre-crisis
period caused more securitization of mortgage loans and the loanable fund for house purchasers increased markedly.
The availability of loan increased the home prices excessively.

In 2007, the overpriced housing market started to decline in the US. Consequently, the price of the mortgage-backed
securities started to fall due to fear of increase of default by the home owners (borrowers). As a result, the repo
lenders started to refuse to lend money against such securities. The securities had to be forcedly sold out to pay the
repo lenders money. The sale pressure of the securities further reduced the price of the same and the loop continued
to worsen the scenario day by day.

Like the shadow banks, the formal banks also accumulated excessive leverage in their balance sheet while
maintaining necessary risk-based capital ratio. The de-leveraging process and the price slump in the shadow banking
system greatly affected these banks. They were compelled to reduce their leverage in a forced manner that caused
huge losses, reduced capital ratio and contracted the availability of the credit in the economy. But it is apparent that
the excessive leverage of the banks contributed to the crisis. Even the banks maintained necessary risk-based capital
ratio. It means that capital ratio alone is not sufficient to protect the stability of financial sector. As such, Basel III
introduces a simple, transparent, non-risk-based regulatory Leverage Ratio to constrain leverage in the banking
sector and supplement risk-based capital ratio as a safeguard against model risk. The leverage ratio is calculated by
dividing tier 1 capital with total exposure.

Substandard quality and inadequacy of capital

Another reason of failure of banks to withstand the shock of financial crisis was substandard quality and inadequacy
of capital. The capital of the banks lacked good proportion of high quality capital like common share and retained
earnings in the pre-crisis period. Short-term subordinated debt was used as tier-3 capital which did not have the
strength to provide support during the prolonged crisis. Rather these debts matured within a short period of time and
banks faced extra pressure to redeem the debts. At the onset of crisis, the banks made large distributions of capital in
the form of cash dividend, share buy-back and generous compensation with the market signaling that they are
sufficiently strong, which actually weakened the position of the banks.

To increase the quality and quantity of the capital base of the banks, Basel III has introduced the following
measures:

i) Tier 1 capital has been divided into two parts: Common Equity Tier 1 (CET1) and Additional Tier 1 (AT1).
Minimum Tier 1 capital requirement has been set at 6 per cent out of which CET1 is 4.5 per cent and AT1 is 1.5 per
cent. However, minimum capital requirement has been kept unchanged from Basel II.

ii) The definition of capital has been made stringent. Tier 3 capital has been eliminated.

iii) A buffer CET1 capital named Capital Conservation Buffer has been proposed @ 2.5 per cent in addition to the
minimum capital requirement. Restriction has been put in distribution of profit (cash dividend and discretionary
bonuses to staff) until the buffer is developed.

iv) In addition, the banks are required to deduct goodwill and other intangible assets, deferred tax asset, shortfall in
provision, defined benefit pension fund assets and liabilities, investment in shares of financial institutions (including

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 Proceedings of the Australia-Middle East Conference on Business and Social Sciences 2016, Dubai
(in partnership with The Journal of Developing Areas, Tennessee State University, USA)
ISBN 978-0-9925622-3-6
bank, NBFI and insurance) in excess of 10 per cent of bank's capital, investment in own share, gain on sale related to
securitization transactions etc. from their capital.

Also, insufficient liquidity buffer is the third point of our discussion regarding the reasons of financial crisis. The
banks excessively relied on short-term low-cost funding to create long-term assets. They also failed to maintain
high-quality long-term assets to stand out the stressed condition. During the crisis, they faced much difficulty to
meet the liquidity needs, which necessitated intervention from the central bank. The crisis revealed that supervisory
standard on liquidity is of equal importance as capital to maintain stability of the financial sector. Accordingly,
Basel III introduced liquidity standard as a complement to the capital standard.

Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio

Basel III developed two minimum standards for liquidity which supplement the BIS's 'Principles for Sound
Liquidity Risk Management and Supervision' published in 2008. These are Liquidity Coverage Ratio (LCR) and Net
Stable Funding Ratio (NSFR). The objective of LCR is to promote short-term resilience of a bank's liquidity risk
profile by ensuring that it has sufficient high-quality liquid asset to survive a significant stress scenario lasting for
one month. The objective of the NSFR is to promote resilience over a time horizon of one year by requiring banks to
fund the activities with more stable sources of funding.

Now, let us focus how pro-cyclicality deepened the crisis. Pro-cyclicality favors the banking system at the buoyant
period but adversely hit at the time of crisis. When the economy runs well, banks' capital rises from higher profit and
lower provision requirement. The amount of risk weighted asset becomes low as the borrowers earn favorable rating
owing to optimistic economic outlook. As a result, banks can earn high credit growth supported by good capital
ratio. As the economic scenario reverses, the banks' capital undergoes pressure from lower profitability coupled with
increase of provision requirement. Risk weighted asset rises owing to lower rating by borrower. Consequently,
banks capital ratio decreases, which compels them to reduce the lending activities. The resultant credit crunch
adversely affects the economy and lengthens the crisis.

To address pro-cyclicality, Basel III suggested countercyclical buffer. This buffer varies from 0-2.5 per cent at the
discretion of national supervisory authority. The buffer is to be built up at the time of high credit growth that may
signal a build-up of system-wide risk and is withdrawn when such threat disappears. The other measure of the Basel
Committee to address pro-cyclicality is to promote forward-looking provisioning by jointly working with the
International Accounting Standard Board (IASB). As an outcome, the IASB has released complete IFRS 9 replacing
IAS 39 last year to be effective from January 1, 2018. IFRS 9 contains forward-looking 'expected loss' impairment
model for classification instead of 'incurred loss' approach of IAS 39.

TABLE 1. WORK PLAN FOR BASEL III IMPLEMENTATION IN BANGLADESH ROADMAP

2015 2016 2017 2018 2019

Min CET-1 Cap 4.50% 4.50% 4.50% 4.50% 4.50%

Cap. Con. Buffer (CCB) - .625% 1.25% 1.875% 2.50%
Min CET-1+CCB 4.50% 5.125% 5.75% 6.375% 7.00%
Min. T-1 Cap 5.50% 5.50% 6.00% 6.00% 6.00%
Min Total Capital 10.00% 10.00% 10.00% 10.00% 10.00%
Min Total Capital +CCB 10.00% 10.625% 11.25% 11.875% 12.50%
Leverage Ratio 3% 3% 3% Readjustment Migration to Pillar 1
LCR >= 100% (From Sep) >= 100% >= 100% >= 100% >= 100%
NSFR >= 100% (From Sep) >= 100% >= 100% >= 100% >= 100%

WHAT ARE THE MAJOR CHALLENGES TO IMPLEMENT BASEL-III?

Capital
The first set of Basel III reforms agreed in later part of 2010 tackled the issue of numerator part of regulatory capital
ratio. While minimum total capital requirements were kept unchanged at 8% of the RWA, the definition of various

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(in partnership with The Journal of Developing Areas, Tennessee State University, USA)
ISBN 978-0-9925622-3-6
components of capital and its composition were thoroughly revised to ensure that capital performs its intended role
of loss absorption. The minimum common equity requirement was raised from 2% level, before the application of
regulatory adjustments, to 4.5% after the application of stricter adjustments. This meant that common equity
requirement was effectively raised from 1% to 4.5%. The Tier 1 capital, which includes common equity and other
qualifying financial instruments based on stricter criteria, was increased from 4% to 6%. It has also been agreed that
there would be a capital conservation buffer of 2.5% above the regulatory minimum requirement to present 8% to
10.5%. In our case, the level of capital increases from 9% to 11.5%, if capital conservation buffer is taken into
account. In this context, it may be pertinent to note that post crisis, major banks in advanced economies have raised
their capital adequacy level significantly. In general, globally banks have raised their CET1 ratio by almost 400 bps
during last four years. And importantly, this is mainly by way of fresh infusion of equity capital.

The second element in the capital framework is the leverage ratio. We have advised banks that they would be
monitored on a leverage ratio of 4.5%. We are watching this closely. Leverage ratio generally does not adjust the
assets for risk weights and therefore would need the required capital for a given balance sheet. We have seen on the
basis of the RW profile of banks that the leverage ratio is not acting as the binding factor for most banks in
Bangladesh. To ensure that the leverage ratio acts as a credible back-stop measure, the Bangladesh Bank would
continue to monitor the leverage ratio behavior of Bangladeshi banks and also the developments of other related
regulatory framework before finalizing the appropriate level of leverage ratio for Bangladeshi banks.

Another element that could lead to higher capital is the changes in the Risk Weighted Assets, more specifically, on
account of proposed revisions to the standardized approaches for risk measurements. The Banks intends to avoid
reliance on credit ratings for determining risk weights for credit risk given the lessons learnt from the crisis.
Although this is work in progress, under the proposed revised framework, banks would be required to utilize a set of
risk drivers like leverage of the entity, NPAs, etc. to determine the appropriate risk weight. Similarly, for market
risk, there would be a requirement to compute sensitivities (delta, gamma, etc.) on a deal level for computing
RWAs. Besides, talks are already underway to review the existing treatment of sovereign assets under Basel
framework wherein exposure to sovereign requires zero or very little capital charge. These proposals will alter the
way banks compute RWAs. Besides, a new explicit capital charge for interest rate risk for banking book positions is
also proposed to be introduced. Further, specific to the advanced approaches for risk measurement, the Basel
Committee is undertaking a strategic framework review with a view to enhancing simplicity, reducing complexity
and at the same time ensuring that the framework remains risk sensitive.

The fourth element impacting capital requirements is provisioning. IFRS 9 requires provisioning based on expected
loss provisions.

Liquidity
The second Challenge comes from Liquidity Framework. The global crisis underscored the importance of liquidity
management by banks. The apparently strong banks ran into difficulties when the interbank wholesale funding
market witnessed a seizure. In fact, I have mentioned elsewhere too that for me it is only a matter of time before a
liquidity risk degenerates into a solvency risk for a bank and therefore needs to be avoided. The crisis proved that
and had it not been for central bank support, the crisis toll could have gone beyond what we saw. The LCR and the
NSFR Frameworks basically address this problem

In the Bangladeshi context, any discussion on the LCR issue brings to the fore the fact that it runs parallel to SLR
requirement. We have over a period of time reduced SLR and of the current level of 21.5%, a portion i.e.7 % is
available for LCR as well. There is always the contention that the parallel need to maintain SLR and LCR poses an
additional burden on the banks in Bangladesh. We are aware of this concern and already communicated our
intention to reduce the SLR requirements in a phased manner. However, there are several factors that would have to
be addressed before we can move further to address the potential overlap.Bangladesh Bank is looking at the
comments received and will come out with the final guidelines taking into consideration the responses to the extent
we can accommodate them.

Technology
The Third challenge is technology. Bangladesh Bank is in the process of making significant changes in standardized
approach for computing RWAs for all three risk areas. These revised standardized approaches themselves will be
quite risk sensitive and will be dependent on a number of computational requirements. Further, Bangladesh Bank

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(in partnership with The Journal of Developing Areas, Tennessee State University, USA)
ISBN 978-0-9925622-3-6
has proposed that for those banks which are under advanced approaches, RWAs based on standardized approaches
may work as some kind of floor. BCBS is working on calibration of these floors. Banks may need to upgrade their
systems and processes to be able to compute capital requirements based on revised standardized approach.

Skill development
The fourth challenge is skill development. This is a requirement both in the supervised entities and within the
Central Bank. Implementation of the new capital accord requires higher specialized skills in banks. In fact, it
requires a paradigm shift in risk management. The governance process should recognize this need and make sure
that the supervised entity gears up to it. Risk awareness has to spread bank-wide, the manner of doing business that
measures risk adjusted returns needs to permeate the system. Top management and the Human Resource
Development Policy of banks thus need to get tuned. Bangladesh Bank also need to hone up their skills in regulating
and supervising banks under the new system. This as an ongoing process and are continuously working towards skill
improvement.

Governance
One can have the capital, the liquid assets and the infrastructure. But corporate governance will be the deciding
factor in the ability of a bank to meet the challenges. Central bank added a separate principle on corporate
governance in its core principles for effective banking supervision which were revised in 2012. It is interesting to
note that before 2012, there was no separate principle on corporate governance. Global community is recognizing
the importance of corporate governance and is trying to fix the issues. Thus while strong capital gives financial
strength, it cannot assure good performance unless backed by good corporate governance.

Complex transactions
Excessive interconnectedness among financial institutions also made the financial crisis so severe. Financial
institutions were engaged in an array of complex transactions, which rapidly transmitted the crisis from one
institution to another. To limit the interconnectedness among financial institutions, Basel III suggested a number of
measures. These measures include: i) the bank's capital will be deducted for investment in shares of financial
institutions (including bank, NBFI and insurance) in excess of 10 per cent of bank's capital, ii) Use of central
counterparties has been encouraged in the over-the-counter derivatives, iii) Higher capital requirement has been
imposed for derivative products and iv) capital surcharge has been made applicable for systemically important
banks.

Challenges for Islamic Banks

Before we proceed to a discussion on the BB's guideline, we need to give attention to one issue: how Basel III is
applicable for Islamic banks. It is important because the BB's capital guidelines contain a separate section for
Islamic banks.

The Islamic financial system has some uniqueness that should be properly addressed while formulating capital
guidelines for Islamic financial institutions. Leverage, which played a major role in recent financial crisis, cannot be
created excessively in this system. Islamic financial products should be linked with real economic activities like
trading, production etc. These products cannot be based on another financial contract since Sharia restricts trading of
debt and undue speculation. Besides, most parts of the fund collected by Islamic institutions are based on risk-
sharing principle, which is equity in nature. Thus the leverage in Islamic financial system should remain limited and
the system is not likely to trigger financial crisis similar to the recent one. Nevertheless, the Islamic financial
institutions are subject to financial losses, may be to lesser extent than their conventional counterparts, from any
crisis originated elsewhere in the global financial system.

At the same time, since the Islamic financial products are asset-based, they often carry market risk (probability of
loss from reduction in market price) to some greater extent. They also have some other unique risks like displaced
commercial risk (commercial pressure to pay returns that exceed the rate that has been earned on its assets financed
by mudaraba depositors).

Capital adequacy standard for Islamic financial institutions should address their uniqueness. At the same time, the
standard should converge with international best practices like Basel framework, where applicable, as Islamic
financial institutions are also part of the global financial sector. In view of the above, the Islamic Financial Services

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(in partnership with The Journal of Developing Areas, Tennessee State University, USA)
ISBN 978-0-9925622-3-6
Board (IFSB), an international standard setting organization for Islamic financial institutions participated by around
200 members including the BB, adapted and modified the Basel frameworks and issued several standards for Islamic
financial institutions. IFSB-15 is the latest standard of IFSB on minimum capital requirement in line with Basel III
which was issued in December 2013 and effective from January 1, 2015. IFSB also has liquidity guidelines
(Guideline for LCR has been finalized and guideline for NSFR is under preparation).

One of the distinctive features of IFSB capital standard is that it elaborates the capital requirement both risk-wise
and contract-wise. It discusses capital requirement for credit, market and operational risks. Besides, it identifies how
financial assets based on musharaka, mudaraba, ijara, istisna,salam, murabaha, qard etc. involve the risks at different
stages of these contacts. Another distinctive feature is that Risk Weighted Asset (RWA) funded by profit-sharing
deposit accounts is excluded from total RWA after making some adjustments for displaced commercial risk.
Additionally, since the Sharia-compliant financial products are asset-based, the pledged assets are allowed for credit
risk mitigation- the method of reducing risk weighted asset by deducting collateral.

STRATEGIES TO IMPROVING THE RISK ARCHITECTURE

Managing the data

In order to meet the Basel III compliance, banks have to ensure that risk and finance teams have quick access to
centralized, clean, and consistent data. The data management requirements of Basel III are significant. If the data is
dispersed across different silos it involves more overhead costs compared to those with a more centralized approach
to collecting, consolidating, and submitting reports under Basel I, II, and III. Data has to be efficiently managed so
as to ensure that calculations for capital adequacy, leverage, and liquidity are done accurately.

Transparency/Audit-ability-data lineage
Once a regulatory report has been submitted, it is highly likely that a regulator will follow up with the bank to
clarify critical issues about how the results were calculated and how the rules were applied. This will require the
bank to identify, check, approve, and submit the data quickly and accurately. This audit process will be especially
difficult for banks if the data is dispersed across multiple silos and systems, as it will take longer to search for the
relevant information. Banks with a centralized data model will be able to respond faster and more efficiently to these
enquiries.

Stress testing
This will be difficult to deliver if organizations have their data distributed across multiple silos. It will take more
effort, time and it will deliver less accurate results, compared with having a data model where all the critical
information is held in a central repository. Placing all the data in a central repository will allow banks to run a wide
array of complex stress tests that meet the needs of the business.

Ways to strengthen risk management

capacities so as to generate adequate and qualitative data? There are various Enterprise Data Management tools
currently available to improve data quality. Banks need to setup sound practices for data governance. That would
involve the following:
• Assessing the current state of data quality at your company.
• Understanding and fixing the root causes of data contamination.
• Creating standards and procedures for data quality.
• Enforcing the policies and procedures that govern the data while the data is in their custody.
• Periodically monitoring (auditing) the quality of the data in their custody.
• Monitoring and advising the end users on proper usage of their data.

CONCLUSIONS
It is more relevant at an economy's macro level to address issues such as systemic risk, market discipline, liquidity
and transparency in the risk-management framework. It is interesting to note that though risk capital may be the
necessary safety cushion for banks, capital alone may not be sufficient to protect them from any extreme unexpected
loss events. In reality, risk capital will remain only a number and may not be effective if banks do not assess their
risk periodically and take timely corrective action when the risk exceeds the threshold limit. Thus, whether it is
Basel II or Basel III, it is crucial that a bank does not depend solely on "regulatory capital". What is needed is a
dynamic risk mitigation strategy, where all employees act as risk managers in their own area. A proper risk culture

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(in partnership with The Journal of Developing Areas, Tennessee State University, USA)
ISBN 978-0-9925622-3-6
needs to be developed across the organisation and " risk" should be an input for future business decision-making.
Risk management should not merely be an activity to comply with regulatory requirements.

REFERENCES
https://rbi.org.in/scripts/BS_SpeechesView.aspx?Id=972
http://www.investopedia.com/ask/answers/041615/what-are-basel-iii-rules-and-how-does-it-impact-my-bank-
investments.asp
http://print.thefinancialexpress-bd.com/2015/02/12/80720
http://www.sciencedirect.com/science/article/pii/S0970389613000293

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