As the Basel IV deadline looms under a year away for many global banks, banks are being urged to adopt a modern data architecture to deal with the transformative changes aimed to fortify bank resilience against future financial downturns. Data company Cloudera warns that a modern data architecture is key to an effective holistic governance model to avoid compliance challenges, especially in the arena of data management.
Basel IV has seen numerous iterations in recent times, with its implementation being deferred from 1st January 2023 to 2024 by the Basel Committee on Banking Supervision (BCBS). This was primarily influenced by the collapse of large regional US banks, such as Silicon Valley Bank and First Republic. The aim of the framework is to mitigate further failures by ensuring banks can calculate risk profiles for customer credit applications with more precision and maintain appropriate capital reserve levels.
The requirements for Basel IV will heavily depend on an in-depth analysis of contextual and historical data, alongside past trends. This kind of data will provide the basis for risk model forecasts, reporting, and will also act as proof of governance via an auditable data chain.
Joe Rodriguez, Sr. Managing Director of Financial Services at Cloudera, stated, "Despite Basel IV being amended and pushed back by the BCBS, we know for certain that it’s coming. Banks must lay the groundwork and develop a modern data architecture. Otherwise, they will face compliance headaches."
To be ready for Basel IV compliance, Cloudera has outlined five tips for banks to optimise their data efficiently: Utilise AI to reduce complexity; draw on new data sources; extract value from data, irrespective of its location; continuously refine and test risk models; and ensure compliance is always and everywhere.
AI can assist in summarising the primary points of Basel IV, thereby mapping them against a bank's data practices and highlighting any necessary changes for compliance. Banks will also need to explore new sources of data for credit risk assessments to provide more accurate outcomes.
Cloudera’s research reveals that 66% of banking and finance organisations in EMEA operate a hybrid cloud model, where data resides in the cloud and on-premise environments. Resolving this added compliance complexity ensures fast and accurate data retrieval and audit, regardless of data location. Stingent and consistent compliance standards need to apply across all geographical locations and platforms, with policies tailored according to data location.
Rodriguez added, "The compliance landscape continues to evolve, so banks can’t afford to stand still. Beyond Basel IV, other regulations such as the Digital Operational Resilience Act (DORA) are on the horizon. This means banks will need to have the capability to move data between on-premise and cloud environments in a secure and compliant manner. A modern hybrid data architecture enables banks to maintain comprehensive audit trails at scale, while making all their data available for analysis."