Financial Crime World

RegTech: Enhancing Compliance Performance for Banking Institutions

Standardised Approach vs Internal Ratings-Based (IRB) Approach

In the context of Basel IV, banking institutions must choose between the Standardised Approach (SA) and the Internal Ratings-Based (IRB) approach to calculate risk-weighted assets (RWAs). Here are the key differences:

Standardised Approach

  • Provides a simpler method for calculating RWAs
  • Has limitations in terms of lower risk sensitivity compared to the IRB approach

Internal Ratings-Based (IRB) Approach

  • Allows banks to use their own risk models to calculate RWAs, subject to regulatory approval
  • Offers greater risk sensitivity and customisation
  • Requires robust data collection, sophisticated modelling techniques, and continuous validation

RegTech’s Role in Enhancing Compliance Performance

RegTech solutions play a crucial role in improving accuracy and efficiency by:

  • Automating systems and advanced analytics
  • Facilitating transition and integration between approaches
  • Streamlining compliance workflows

Benefits of RegTech

RegTech offers numerous benefits to banking institutions, including:

  • Reducing manual tasks and freeing up resources for strategic activities
  • Minimising errors and ensuring consistent regulatory reporting
  • Reducing operational costs
  • Enabling faster adaptation to regulatory changes

The future of RegTech is exciting, with Artificial Intelligence (AI) and Machine Learning (ML) set to further enhance compliance functions by providing advanced risk analysis and predictive insights. Additionally, RegTech solutions will become more accessible to smaller financial institutions, democratising compliance.

Collaboration between Regulators and Technology Providers

The ongoing collaboration between regulators and technology providers is crucial in ensuring that RegTech solutions meet regulatory requirements and address industry challenges efficiently. By working together, they can develop standards and frameworks that ensure the effectiveness and reliability of RegTech solutions.