Basel II


Basel II is a banking supervision accord which was created to serve as an international standard which banking regulators can apply when creating policies regarding the minimum capital requirements banks need to set aside to serve as protection against underlying financial and operational risks that banks face. Basel II is the second of Basel Accords, which are recommendations on banking laws and regulations issued by the Basel Committee on Banking Supervision.

According to supporters of Basel II, such international standard can help protect the international financial system from the types of problems that might arise should a major bank or a series of banks collapse.

As prevention, Basel II utilizes rigorous risk and capital management requirements which are intended to ensure that a bank holds capital reserves appropriate to the risk the bank exposes itself to through its lending and investment practices. This generally means that the greater risk to which the bank is exposed, the greater the amount of capital the bank needs to hold to protect its solvency and overall economic stability.

Objectives
The Basel II intends to:
1. Ensure that capital allocation is more risk sensitive;
2. Separate operational risk from credit risk, and quantify both;
3. Attempt to closely align economic and regulatory capital to decrease the scope for regulatory arbitrage.

While the final agreement has largely addressed the regulatory arbitrage issue, there are still areas where regulatory capital requirements will diverge from the economic.

Basel II has largely left unchanged the question of how to actually define bank capital, which diverges from accounting equity in important respects. The Basel I definition, as modified up to the present, remains in place.

Basel II in Action
To promote greater stability in the financial system, Basel II utilizes a Three Pillar concept:

  1. Minimum (risk weighted) capital requirements
  2. Supervisory review process
  3. Disclosure requirements

The First Pillar deals with safeguarding of regulatory capital calculated for three major components of risk that a bank faces: credit risk, operational risk and market risk.

Credit Risk can be calculated in three different ways of varying degree of sophistication: Standardized Approach, Foundation IRB and Advanced IRB. (IRB stands for Internal Rating-Based Approach.)

Operational Risk uses three different approaches: Basic Indicator Approach (BIA), Standardized Approach (TSA), and the Internal Measurement Approach (an advanced form of advanced measurement approach or AMA).

Market Risk uses the preferred approach of Value at Risk (VaR), which is used to measure in financial services to assess the risk associated with a portfolio of assets and liabilities.

The Second Pillar deals with the regulatory response to the first pillar, giving regulators much improved tools over those available under Basel I. It provides a structure for dealing with other risks a bank may face, as in reference to systems, pension, concentration, strategy, reputation, liquidity and legality, which the agreement combines under the title of Residual Risk. It provides the banks with the power to review their risk management system.

The Third Pillar requires that bank activities be transparent to the general public. The bank is supposed to release relevant financial data (financial statements) to the public (such as through its webpage). This aims to enable depositors to better evaluate bank condition and diversify their portfolio accordingly. It is believed that this pillar will enhance the role of market discipline in financial markets.

The Banking Conduct Regime


The Banking Conduct Regime is one of two major regulations which were brought forth by the Financial Service Authority (FSA) on November 1st, 2009. It was introduced to replace the Banking Code Standards Board’s industry owned codes – the Banking Code and the Business Banking Code – and their non-lending aspects. The Banking Conduct Regime is now implemented onto the processes of accepting deposits, payment transactions, and certain aspects of payment accounts.

Some of the benefits of the Banking Conduct Regime include:

  • Regarding Bank Accounts:
    • Customers will get instant access to their accounts, be they saving accounts or current ones. The Banking Conduct Regime ensures that bank account owners are informed two months prior to any interest changes which can be disadvantageous.
    • Transferring cash electronically will need to be completed by the end of the following business day. However, there are chances this process may be extended to the third working day.
    • If account owners claim that a transaction wasn’t authorized by them, the bank should either prove that they authorized the transaction or had misplaced/leaked out their PIN or password. If that isn’t proved, the bank is responsible for refunding the money instantly.
    • Regarding Money Transfers:
      • Clients’ money will be safe because larger payment service providers will be forced to keep cash separate from their own funds.
      • Smaller companies will have the option of protecting their customers’ money with the Banking Conduct Regime. However, it is always a better idea for these service providers to adopt this regulation as it guarantees them more clients.

By looking at these benefits, it is evident that the new Banking Conduct Regime is all about providing more benefits to customers. To ascertain this, the FSA has announced that it will monitor and forcefully implement Principle 6, which indicates that a firm should pay more attention to the interest of its clientele and make sure to treat them fairly.

Introducing The New Banking Best Practice: BASEL III


Just as 2010 approached its last few months, the Bank for International Settlements (BIS) decided that it was about time that it published its latest international regulatory framework for banks: BASEL III. According to BIS’s website, BASEL III is a comprehensive set of reform measures which are deemed necessary by the Basel Committee on Banking Supervision.

In addition to enforcing the regulation, supervision and risk management of the banking sector, BASEL III was created to:

  • Enable the banking sector to recover from shocks caused by financial and economic stress
  • Boost banks’ risk management and governance capabilities
  • Effectively manage banks’ disclosures

The New Rules Added to BASEL III

In addition to the same rules of BASEL II, BASEL III comes with a few new rules –

  • All banks should adjust their Tier 1 leverage ratio to be 3% at the very least.
  • The BIS will start monitoring the leverage ratio starting January 1st, 2011. However, the ratio will be tested from January 1st, 2013 and last until January 1st, 2017. Banks should make sure of disclosing the ratio on January 1st, 2015.
  • Banks will have until 2015 to get their leverage ratios sorted out before they are provided to the public. However, there is a chance that this may change if the rules are unanimously voted as too strict. This is why final rules will finally be set on January 1st, 2018.

Any bank which fails to meet the requirements set by the BASEL III framework will be banned from paying dividends to shareholders until it produces an accurate balance sheet. Thus, banks with professionals and officers with Basel II knowledge and experience need to get their staff to start studying the differences between BASEL III and its predecessors. This way, banks can save themselves from being punished by the BIS.

The Primary Objectives of Bank Regulations


The primary purpose of bank regulations is to serve as a government law for commercial and private banks and financial institutions. Banks and financial institutions regulating within a country are required to fulfill the requirements of the bank regulations of that particular country.

The Aims Achieved Through Implementing Banking Regulations

Bank regulations are made for one country or state, and can be changed according to the financial environment of a country. This means that the bank regulations of any country can be changed to encourage growth and further promote the financial condition of the country.

Here are some of the common objectives of bank regulations that are followed in mostly every country of the world:

To Protect Depositors:

The first objective of bank regulations is to safeguard depositors from any risks they might face while investing in a bank. In other words, bank regulations protect depositors while they are using a commercial bank.

To Avoid the Misuse:

It is perhaps the most vital objective of bank regulations to avoid misusing the banks within a country. Adverse financial conditions can happen and banks can go astray. Therefore, to avoid such situations, bank regulations are created. Whether it is a private bank, public bank or a commercial bank, all banks need to adhere to these regulations.

To Safeguard the Banking Privacy:

The third most important objective of bank regulations is to safeguard banking confidentiality. No bank is allowed to offer interest rates or profits on investment more than what the bank regulations have determined. This way, all the banks of a country work in harmony with each other and easily help in promoting the overall growth of the financial environment in a country.

Allocation of Credit:

The final objective of bank regulations is to monitor the growth of credit and direct it where needed.

The Three Fundamental Principles of Bank Regulations


As we all know, banking regulations can change depending upon the requirements of every country or state. However, there are certain principles of bank regulations that never ever change. In other words, these are the principles which are there in every country’s bank regulations.

Here are the three fundamental principles of bank regulations that are bound to last as long as bank regulations will do:

Meeting the Minimum Capital Ratio Requirements:

First and the foremost, every bank regulation in the world has the clause for the banks following it to maintain minimum capital ratios. These are requirements levied on banks so that they can promote their duty of being regulators. Each and every bank of a country must follow this principle in order to remain licensed.

Maintaining Market Discipline:

Another very crucial principle of bank regulations which must be conformed to by every bank of the country is that of maintaining market discipline. This principle compels the banks within a state to disclose the financial and other similar information yearly or monthly to the public. The reason this principle is a must is to make sure that the investors, depositors and the employees of a bank can assess the financial risks a bank may face.

Getting Licensed:

No bank in a country is allowed to function without obtaining a license by the regulators. The regulator is responsible for supervising all the licensed banks and monitor whether or not they are complying with the regulations. If any bank works against any requirement, the regulator is authorized to cancel its license.

Each and every bank must adhere to the principles of bank regulations within that country. The above given ones are just the three basic principles regulating worldwide today. However, this does not mean that bank regulations worldwide only have these three principles and none other.

The Major Requirements of Bank Regulations


Bank regulations are more or less banking laws set forth by the governing authority of a country. They include a variety of factors and can change over time depending on economic conditions. Each country has a different set of bank regulations; however, there are certain aspects which remain unchanged throughout. These are actually the requirements which are set forth for the banks to comply with if they want to remain running.

Here are some of the most common requirements found in nearly every bank regulation around the globe:

Requirements for the Reserve:

Each bank must comply with the reserve requirements set by bank regulations. These requirements have a specific amount of reserve which banks should have in order to demand deposits and banknotes. The reserve requirements are usually combined with capital requirements; yet, they are important to consider by the banks.

Capital Requirements:

The capital requirements clause in the bank regulation sets a structure for the banks to handle their capital in relation to their assets. These requirements are the basics of every bank regulation, and every bank must adhere to them.

Financial Reports/Disclosure Requirements:

Every bank is required to prepare and submit yearly financial statements according to the standard mentioned in the bank regulation. The bank is also supposed to get these reports audited and published for its clients to see. Also, before being published, these reports need to be attested by the authorities of the bank.

Requirements regarding Credit Rating:

The bank regulation of every country sets forth a minimum credit rating for banks to comply with. Banks need to obtain credit ratings from reputable and licensed credit rating agencies and disclose it to investors and potential investors.

Exposure Restrictions:

The exposure a bank is making regarding its assets should be limited to a certain extent as defined in the bank regulations.

404 Compliance Tips


In 2004, the Securities and Exchange Commission implemented the Section 404 of the Sarbanes Oxley Act (SOX). Because of this, public and private accounting firms need to comply with the Section 404, i.e. accounting firms need to document, test, report and evaluate their controls over financial reporting.

The process made things complicated for numerous accounting firms, especially the ones with an IT infrastructure. Many companies lost their licenses because they couldn’t comply with the process. Although there is no rocket science involved in it, many of the companies felt perplexed while adhering to the act.

Here are some professional tips on how to comply with the Section 404 of SOX easily:

Create Awareness:

The first step towards complying with the legislation is to make sure that the employees of your company are well aware of what it has. You can arrange conferences and seminars in which you can train your employees and educate them about the legislation.

Make Your Own Plan:

Since the act was implied, many companies started sharing their plans with other companies which finally created a tragic situation – many of them got their license canceled. The tip here is to always create your own SOX 404 plan and program according to your specific business requirements.

Hire an Advisor:

Possibly the best thing to do in order to comply with a much complicated legislation like the 404 is to hire an advisor. The advisor will perform monthly visits to enlighten your employees, directors and other major team players about the process. He or she can also spot out the weak areas of your company and can suggest tips on how to improve them.

Keep Room for Flexibility:

The laws can be changed any day, so you need to make sure that you have enough flexibility in your 404 SOX program to meet any changes that come up.

About Basel III Certification


Basel III is the latest update to the world renowned Basel II framework. Financial institutions are quick to adopt this new framework because it tackles the weaknesses of Basel II and offers more advantages. However, as important as Basel III is for companies these days, companies think twice before hiring anyone who doesn’t have an accredited Basel III certificate.

The Basel III Compliance Professionals Association is a global community of Basel Compliance professionals which helps those interested to get their own Basel III certificates, and then informs them of the G20 efforts to regulate the global financial system, explore new careers and learn skills that will last them a lifetime.

Benefits of Basel III Certificates for Employees and Consultants

Basel II professionals applying for the Basel III certificate will be able to reap the following benefits:

  • Higher Salaries – According to salary surveys, certificates are well known keys for boosting income. Basel professionals are usually paid handsome sums, and the latest certificate can help them earn even more.
  • Better Job Opportunities – Basel III certified professionals will always be considered first for prominent positions in an institution. This is because their employers know that certification holders are well aware of the best practices of the industry and will steer the company away from failure and problems.
  • Better Credentials – For professionals aiming at growing their careers elsewhere, having the Basel III certification on their list of achievements is a surefire way of getting a job. This is because it demonstrates the professional’s ability and shows off his or her desire to remain up to date.

How to Earn the Basel III Certificate

For professionals who seek the Basel III Certification, the Basel II Accord certificate must be obtained first. IT auditors, chief risk and compliance officers, and IT, security and management consultants are recommended to train before applying for the certificate exam. Numerous institutions offer three-day training courses while others offer virtual-led and distance learning programs. Finding and enrolling in these is easy, but retaining the material necessary for the certification exam isn’t. Therefore, applicants should practice well before sitting for it.

Mobile Banking Security Regulations


Author:  Bernard-Louis Roques

Mobile banking is one of the best developments that technology has brought with it. Financial institutions and business people constantly need to make transactions across states and countries. Mobile banking has made things a lot easier but has also raised concerns about security to ensure best practice. It is a revolution in the conservative world of payments.

With the ease of access, the ratio of fraudulent mobile banking transactions has increased. Therefore, there are certain best practices for mobile banking security people can put into practice for convenience.  Additionally financial and business institutions are being encouraged to comply with regulations imposed by the federal government in order to keep a check on transactions.

  • USA Patriot Act: All financial institutions are obligated to ensure best practice by complying with this act. It is a law which requires banks and all financial institutions providing mobile services to implement proper identification of people availing these services. As best practice institutions are required to set off security protocols with test questions and authorization PIN codes. Additionally, change of phone numbers and addresses of people and organizations using mobile banking must be updated as a best practice.
  • Regulations for Money Laundering: Implementation of Anti-Money Laundering Compliance Programs is a crucial best practice. The Bank Security Act (BSA)which was introduced in 1970 necessitates monitoring and preserving records for reference to customers’ criminal activities in banking. This act is also referred to as the Currency and Foreign Transactions Reporting Act. Therefore, it is a best practice required by all financial and banking institutions to preserve records of investigations, tax evasion, terrorism and any form of criminal activity of their clients. Any transaction exceeding $10,000 cash payment must be reported in the 8300 form and forwarded to the IRS. The use of Anti-Money Laundering Compliance Programs assists officers overseeing transactions and ensures that records are maintained in compliance with government protocols.
  • Manage Liabilities and Risk Allocation: There is a need to negotiate liabilities and manage risk allocation by both financial institutions and mobile services. This is the best practice which requires both parties to secure their services and protect the interest of people using mobile banking. Financial institutions are expected to properly complete and close transactions including credit cards.
    There are guidelines and details that banks need to follow as best practice to protect themselves and the clients before issuance of credit cards, ATMs, etc. On the other hand, mobile service providers are only obligated to provide the mobile services. They have limited liability and banking security, and hence banking risks management is not solely their responsibility. They are however expected by law to utilize fraud detection measures to increase security to mobile services.

Therefore, compliance with mobile security regulations is a best practice required by any business and financial institution using mobile banking.

Bank Account Entry with Best Practices


Automated Clearing House is a system that banks use for those interested in getting house loans. The ACH program sends information about payments made to vendors by suppliers. The importance of the AHC program was to ensure best practices.

Employees could access the bank account forms and setup their accounts for dealing with a supplier. They could setup the account and assign that bank account to those of existing suppliers. This best practice enables an employee to know whether a supplier has paid via ACH or not. At the same time, this allowed people to create fake bank accounts due to lack of best practices. After creating fake accounts, they were assigned to supplier companies through the bank form. As a result many companies paid into fictitious bank accounts. Therefore, best practices were needed to ensure prevention of the opportunity to commit fraud.

In order to handle this problem, two approaches were taken to implement best practices. These included:

  1. The role of the person  with the capability to preserve the account information in the bank needed to be discussed in-dept
  2. Data entry had to be reviewed thoroughly

First of all, this leads us to the most important question. Who can preserve bank account entries and maintain them with best practices?  The best way to answer this question is by identifying the qualities of the person that SHOULD NOT be given these responsibilities.

Since Suppliers are also assigned the bank information on accounts, therefore people that can access the supplier form should not be allowed bank information in the ACH form. This is what allows them to create fictitious accounts. The process of data entry about bank accounts must be handled as a clerical best practice. It must be involved an approved form or email and must be performed by someone without access to processes like; beginning the process of requisition, preparing purchase orders, ensuring payments are made or recording invoices.

Secondly, we need to know how the data review must be done to make it detailed. As a best practice, the account information and related data can be included in the key controls. Therefore companies must establish a process or method to validate the entered data for best practices. It must be accurate, complete and timely. There are two options for this:

  1. Developing a custom system for workflow requiring secondary approval of entered data. The data will first be presented by the supplier or employee. Then it will be passed on to an approver who will enter the data. After this, a second verifier will assess the accuracy of the data entry.
  2. There could be a manual method of controlling the process of data entry. The filled forms will need to be entered manually by a first person, and then reviewed for approval by a second person. However, this is not a best practice for adequate auditing.

To ensure proper entry of data, there is a need to assign duties as assignments to those employees that play an important role in account entry. This is a recommended best practice for banks. There are other issues related to entry of data for bank accounts and assignments in banks.

In this section we will discuss:


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