While always an important consideration, products that streamline banking operations are now more vital to increasing bottom lines. With the coming changes in the capital requirements proposed by international regulators, strong bottom lines will be more critical than ever.
Basel III Morphs into Basel IV
The Basel Committee on Bank Supervision (BCBS), which reached accords with the world’s banks, has been plagued by spotty or incomplete implementation. Basel I, first drafted in 1988, established minimum acceptable levels of bank capital to minimize asset and credit risk.
Basel II, appearing in 2004, revised and updated the structure of Basel I, refocusing and limiting capitalization to stated balance sheet assets only. Many believe this modification contributed to the subprime financial crisis, leading to the recent worldwide recession.
Adopted to defeat recessionary effects, Basel III focused on issues different from those addressed in Basel I and II. Many U.S. banks chose not to implement all provisions of Basel II, with the support of the Fed and the FDIC. However, many European banks already took advantage of Basel II’s modifications to establish large portfolios of sovereign debt, contributing to a global financial crisis. Additional regulatory capital restrictions, indicating a major change in Basel III has led observers and ban executives to refer to the coming regulations as Basel IV. Credit union executives face additional issues because of the difficulty in raising additional capital major and community banks do not face when they can sell more stock.
Streamlining Operations to Better Manage Costs
Top financial institution partners, such as BankTEL Systems, offer accounting, financial and vendor management software to control costs and streamline operations. For example, with over 1,400 financial institution clients in all 50 states, BankTEL offers proven financial accounting and cash management software that improves bank efficiency and often makes positive contributions to net profits.
While strong bottom lines are vital to credit unions’ ability to increase capital, banks need healthy profits to encourage investment to enhance their capital positions. The challenges to increase revenue for financial institutions are often daunting in the current business environment.
Streamlining operational efficiency is best accomplished using state-of-the-art technology, which generates a healthier bottom line. Bank executives should match their policies and procedures with cutting-edge technology to maximize the benefits of more efficient operations.
Automating financial institution internal processes cuts operating costs that previously may have proved troubling, particularly if the institution functions in a market area that discourages revenue increases In overly competitive markets, instituting new revenue-generating fees can be impossible for banks hoping to
enhance their brands and/or increase core deposits.
Typically, using integrated accounting software and other automated processes reduces costs significantly,
translating to higher net income. Since growing retained earnings increase capital, strong net profits boost
bank and credit union capital percentages.
Does Basel IV Go Too Far?
Some banking industry experts, such as the managing principal of MRV Associates, believe the prospective changes of Basel IV may go too far, provoking financial institutions to strongly “push back.” Key provisions troubling bank executives, boards and industry observers involve the BCBS demanding that banks be more transparent in disclosing how they determine riskweighted policies. This forces institutions to clearly disclose how much risk they assume—and why.
Current Basel III rules offer banks wide discretion in credit and operational risk assessment policies. Banks have no obligation to disclose the criteria used in credit risk decisions. Banks want to keep this control and appear ready to fight for that right. Decision-making bank executives must decide how strong a fight they want to generate. Since the BCBS appears to be committed to regulation reform, particularly as it addresses capital level calculations, this could become a long, bitter battle. Are bank executives and boards equally committed to waging such a battle? Does more transparency encourage higher capital? Do liquidity minimums play a role in increasing or decreasing capital, depending on risk assessment policies? At this time, it is impossible to know how the bank-BCBS war will be waged. Stay tuned for further developments.
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