Banks could make 'substantial cost savings' by delaying Basel II compliance

Banks could make 'substantial cost savings' by delaying Basel II compliance

UK banks could make substantial savings by delaying compliance with the Basel II capital accord until after 2007, according to research by the Cass Business School and consultancy Charles River Associates.

The UK's Financial Services Authority (FSA) is allowing banks to choose whether to adopt basic or more advanced levels of compliance to 'Pillar 1' of the Basel II regulations when it is implemented in 2007.

Alistair Milne, senior finance lecturer at Cass Business School, says banks could save substantial amounts by setting their own, slower, timetable for advanced compliance and delaying implementation until 2009 or 2010.

Milne says the main reason banks are rushing to achieve advanced compliance by 2007 is because it will lower their average regulatory capital requirement by one fifth, from 2.8% to 2.2% of total assets. But this saving is offset by the short term implementation costs, which are estimated to be up to £200 million for medium to larger sized UK banks. According to the study, it will take 10 years for the reduced capital requirement to pay back the initial cost of advanced compliance.

"Advanced compliance requires big system changes and with many banks rushing to achieve full compliance in the next two years, pressure of demand is pushing up the costs of implementation. Expenditure on data collection, changes to systems, and training for staff will all far outstrip any short-term gains from lower regulatory capital," says Milne.

He says the real priority is for banks to focus on Pillars 2 and 3 of the accord, and make sure risk management systems are robust enough to withstand close regulatory scrutiny.

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