21 October 2017

Banks falling behind on Basel

23 February 2004  |  7070 views  |  0 clock

Many banks are falling behind on their projects to implement the Basel Accord on capital adequacy, according to a global survey by KPMG of 294 financial institutions in 38 countries, with around half still only in the pre-study or assessment phase.

Implementation of the new capital rules is due in 2007, but requires that banks are using Basel compliant systems and data for several years before then.

Globally, around 10% of banks are still establishing their Basel teams – and in the Asia Pacific region this climbs to as high as 22%, says KPMG. The survey found that only eight percent of banks have reached the testing and validation phase of their project on credit risk (15% in the Americas), while operational risk lags further.

The cost of complying with Basel was seen as the biggest barrier – perhaps not surprisingly, as half of respondents said that their total Basel budget was less than $1 million. For a handful of banks however, budgets stretched to in excess of $40 million.

Other common concerns were lack of time, lack of data for operational losses, inflexibility of existing IT systems and, in the Asia Pacific region primarily, a shortage of Basel experts. UK banks also are worried about the supervisory process and how the regulators will assess the robustness of the systems that they have developed.

Jane Leach, Basel partner in KPMG's financial services practice in the UK, says: "The inflexibility of IT systems emerged as a particular concern in Europe, and as IT is vital to the success of Basel, this needs to be addressed as a priority."

Although many banks are struggling to keep their Basel project on track, there appears a clear consensus of the benefits of implementing the new rules. 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.

Says Leach: "There is a realisation that Basel is less about reducing regulatory capital and more about running the whole business smarter."

Despite this, only 41% of respondents agreed that there was the possibility of leveraging synergies between Basel and IFRS (International Financial Reporting Standards).

"We believe that there are some synergies to be gained in raw data collection," says Leach. "But many banks seem to have difficulty connecting up the two projects in this area."

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