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Banks wary of Basel II benefits

25 July 2005  |  9506 views  |  0 cash - bank notes in BW

Banks are still concerned about costs of implementing the technology required to comply with Basel II regulations and are increasingly uncertain about the benefits of compliance, according to research conducted by Accenture.

A survey of senior executives responsible for Basel II compliance at 63 US and European banks found that firms are finding implementation tougher than anticipated and are less convinced about the benefits of compliance than they were a year ago.

Almost half (45%) of respondents said they expect to spend in excess of EUR50 million through 2007 on Basel II compliance, up significantly from 23% in last year's survey. Accenture says banks also seem to have a much better idea of the total cost of compliance, with only 10% of respondents saying they remain unsure of the total cost, compared with 29% last year.

The research shows that European banks are still further along the Basel II implementation cycle than those in North America, possibly due to last year's decision by US regulators to delay application of the framework domestically.

But the survey shows that for European banks, expected levels of spending on Basel II compliance are migrating higher. When asked their programme estimates, 33% of European respondents said they expected to spend between EUR51 million and EUR100 million, up significantly from only 16% last year. Conversely, surveyed banks expecting costs of EUR26 million to EUR50 million declined from 22% last year to only nine per cent this year.

Paul Cartwright, managing partner of the finance and performance management practice in Accenture's financial services operating group, says as North American banks are earlier in the implementation cycle they are probably underestimating compliance expense, adding that US banks appear to not yet comprehend the full impact of Basel II, as 39% expect to spend no more than EUR25 million on compliance.

Across both regions, for most banks the bulk of Basel II spending will be on credit risk and IT systems.

The research also found that banks are less enthusiastic about the benefits from investing in Basel II compliance than they were last year. When asked how they viewed investing for business benefits beyond basic Basel II compliance, 60% of European participants said the business case was "strong" or "very strong," compared with just 34% of North American respondents.

Across all geographies, there was a sharp decline in the positive perceptions of benefits from implementing Basel II. Only 35% of respondents strongly agree that the framework will improve capital allocation, down from 55% last year. In addition, only 25% strongly expect enhanced process efficiency, down from 43% last year.

Cartwright says banks' experience with Basel II continues to lower the industry's expectations about what compliance will actually achieve and at what price: "Unfortunately, these cost concerns are overshadowing the positive long-term business case for many banks. Some are focused solely on cost, while others are looking at the major benefits and competitive advantage that modest additional investment can bring."

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