Banks wary of Basel II costs

Banks wary of Basel II costs

Executives at the world's top banks are growing wary of the rising costs of implementing the risk management frameworks and capital systems required to comply with the Basel II regulations, according to research by Accenture, Mercer Oliver Wyman and SAP.

Publication of the research findings coincides with offical approval of the Basel II regulations by central bank governors and regulatory heads from the G10 countries.

The survey of executives responsible for Basel II compliance at 97 of the world's 200 largest banks in April and May found that more than 70% are planning to adopt the advanced regulatory approaches on both the credit risk and operational risk sides.

But, according to the research, uncertainty about the budgetary impact of compliance is broad, with nearly a third (31%) of respondents saying they remain unsure of the total cost of their Basel II programme. The level of uncertainty cited by respondents was highest among banks in the US (59%) and Asia (54%), more than twice the rate of European banks (20%).

Of those banks providing estimates, most banks with assets under US$100bn expect price tags of EUR50m or less while nearly two thirds of larger banks project costs of more than EUR50m.

Many banks surveyed are finding ways to lower compliance costs. While nearly 60% of banks surveyed plan to implement new solutions to meet the new operational risk requirements, nearly half plan to take lower-cost routes by developing systems internally or modifying existing technology. In addition, centralising credit data storage is on the agenda of 63% of banks.

However, the majority of banks said they see significant benefits from Basel II, especially in improved capital allocation (63%), better risk-based pricing (53%) and reduced regulatory capital requirements (37%).

The survey indicates that many banks still have "significant work" remaining to comply with two of the three major elements of Basel II - setting up a risk-based supervisory structure and increasing market discipline through expanded disclosure. Nearly two-thirds (63%) of banks described their enterprise-wide risk management framework as poor or average. Just over 60% described their economic capital systems as poor or average.

Paul Cartwright, a managing director at Accenture, says the survey confirms that a quick database and reporting fix was never going to work: "Many banks now clearly see the need for combined information technology (IT), organisational and process change. Although budgeting was hurt by the last two years of worldwide cost-containment, banks are finding they face significant compliance challenges."

The results also indicate that banks in US and Asia Pacific lag behind Europe in several key areas of preparation for Basel II. Three quarters of European banks have completed strategic assessments compared with only 12% of the banks surveyed in the US and 22% in Asia-Pacific. More than 60% of European banks have progressed to implementation, compared with only 12% in the US and 15% in Asia-Pacific.

Accenture says the disparity may reflect a lack of confidence among American bankers in existing credit-risk measurement systems. When asked about rating model performance, model validation and use-test compliance, US bankers responded that they do well in these areas at less than half the rates of their European counterparts. US banker evaluations on capability related to three other credit-risk tools were also lagging.

Finextra is conducting research into the business issues involved in regulatory compliance. To participate in the survey and receive a free report, fill in the questionnaire now: Finextra Compliance Survey

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