If there is one category of financial instrument that has been most frequently blamed for the financial crisis that plagued US and European financial markets in 2008, it was derivatives. Predictably, governments in both jurisdictions have moved to review the existing regulatory framework and develop new rules that would reduce the likelihood of such a crisis occurring again. In the US, these new rules were actualized by the Dodd Frank Act of 2010 (in full, the Wall Street Reform and Consumer Protection Act).
Solvency II has 3 pillars – Pillar I that address capital requirements, Pillar II that is focused on workflow, governance and audit, while Pillar 3 details the framework for reporting. Unsurprisingly, Pillar I has attracted the most attention with insurers evaluating their entire business to determine what the new capital requirements will entail. But the significance of Pillar 2 and 3 is gradually dawning on the industry as institutions realize that compliance with these aspects will be just as important.
2007 to 2009 is a period that will remain etched in the minds of financial industry policy makers for years to come. Complex financial instruments, wrongly priced risks coupled with pressure to churn ever higher employee bonuses and bank profits all combined to create the biggest financial crisis since the Great Depression. The US and EU financial markets, once assumed impregnable, faced the real possibility of collapse pulling down the global economy in the process. As hundreds of billions of dollars in government bailouts were pumped into banks and insurance companies considered ‘too big to fail’, regulators had to come to grips with the fact that the Basel II guideline on bank risk management had loopholes and inadequacies that had to be addressed to prevent a recurrence. And with that, Basel III was born.
Just how expensive is Solvency II? Well, if the UK’s Financial Services Authority (FSA) is to be believed, the anticipated cost of new technology and external consultants necessary for compliance is likely to exceed US $3 billion. This is a substantial expense for many European insurance firms especially when you consider that 1 in 10 do not currently satisfy the envisaged capital requirements. Whereas the deadline has been pushed back a couple of times, there is no dodging Solvency II compliance for insurers in Europe. Continue reading
Basel III Not the last Regulation of its Kind
Scheduled for implementation between 2013 and 2019, Basel III takes over from its predecessor Basel II. But while the new Basel framework is meant to strengthen the management of international banking risks and thus protect bank’s customers and global financial markets, it is certain that Basel III will not be the last major regulation thrust on the banking industry. Already, banks in some jurisdictions have to deal with additional rules such as IFRS and the Dodd-Frank Act with more likely in the pipeline as the full impact of the 2007-2009 financial crisis comes into proper perspective. Continue reading
As Europe’s largest financial services institutions face a growing number of new or revamped regulations including Basel III, UCITS IV, MIFID II and Solvency II, they are caught in a dilemma. They could create separate data management infrastructure for the different regulations or they could implement a single solution that would require minimal tweaking to deliver the reporting required by each of the new regulations. Purchasing separate systems for each can be prohibitively expensive – a converged solution is the way to go.
Quality Data Means Quality Decisions
Whenever any of us walks into our family doctor’s office for treatment or a routine checkup, one thing we expect is that the historic medical data the doctor possesses on us is complete, accurate and appropriate. If you previously suffered multiple fractures due to a road accident, your family doctor should already know about it. In case you are allergic to aspirin, too that should form part of your medical history. Such background data is crucial in ensuring that whatever drug prescriptions or lifestyle recommendations the doctor eventually delivers lead to better overall well being.