| Banks falling behind on Basel II
Amongst UK banks, progress is generally greater - but they have concerns around the cost of implementing Basel, lack of IT flexibility, and uncertainty over how the regulator will be assessing the robustness of the systems they have developed. Many banks are also concerned about the disclosure requirements under Basel. These concerns reflect both the considerable amount of information that will need to be published, and the danger of misinterpretation by the markets. Globally, around 10 percent of banks are still establishing their Basel teams - and in the Asia Pacific region this climbs to as high as 22 percent. Only eight percent of banks have reached the testing and validation phase of their project on credit risk (although this rises to 15 percent in the Americas). Yet testing and validation is one of the key phases of the overall project and one that often proves difficult to complete. Banks therefore need to be reaching that stage soon, at least for their main portfolios - but for a large number of banks, this does not look likely. Although many banks are struggling to keep their Basel project on track, there is a clear consensus amongst them of the benefits of implementing the Basel requirements. The most widely perceived benefit is an improved credit rating system, followed by improved management of operational risk. A reduction in capital requirements was only the fourth most highly rated benefit. Commenting on the findings, Jane Leach, Basel partner in KPMG's Financial Services practice in the UK, said: "Whilst globally many banks seem to be in danger of falling behind, it is encouraging that there is a clear perception of the advantages to be gained from Basel, especially in its potential to enhance credit ratings and so produce a benefit that will have positive ramifications across the business. As banks have got further into their Basel preparations, they appear to have shifted their attention away from their initial focus on the possibility of a lower capital requirement. There is a realisation that Basel is less about reducing regulatory capital and more about running the whole business smarter." Approaches Banks are also generally planning to take a more advanced approach to credit risk than operational risk - over a quarter are intending to take the most advanced approach to credit risk, while only 11 percent plan to do so on operational risk. In general, more European banks are planning to take advanced approaches to Basel, while more Asia Pacific banks are intending to take basic approaches. In the Americas, banks are polarised between the most basic and advanced approaches. A relatively low proportion of respondents (41 percent) agreed that there was the possibility of leveraging synergies between Basel and IFRS (International Financial Reporting Standards). Barriers Other widely cited concerns were lack of time, lack of data for operational losses, inflexibility of existing IT systems (a concern in Europe especially) and, in the Asia Pacific region primarily, a shortage of Basel experts. UK and Europe "In the UK specifically, it is notable that the area giving banks the most concern is that of supervisory review. Clearly, banks feel unsure of how the FSA will be assessing the robustness of the systems that they have developed. The cost of Basel and the level of internal resources were also prominent concerns. "It is interesting too that banks generally do not appear to be at all convinced of any synergies between Basel and IFRS. We believe that there are some synergies to be gained in raw data collection, but many banks seem to have difficulty connecting up the two projects in this area."
•Date:
24th February 2004 •Region: Various •Type:
Article •Topic:
Operational risk |
