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Risk managers confused by Basel Accord

09 April 2003  |  6347 views  |  0 crowd

Risk professionals remain undecided about the best approach for complying with Basel II capital adequacy requirements, with 30% of attendees at PRMIA's (Professional Risk Managers' International Association) European risk summit admitting they will be unlikely to meet the standard by 2006.

The survey was conducted by Reuters in association with PRMIA from a sample of delegates at the Paris summit representing major local, European and international banks.

Issues surrounding Basel II, such as credit and operational risk were key priorities among delegates, with 53% of respondents stating they planned to spend in the range of EUR100,000 - EUR5 million on new related credit risk IT solutions in 2003. A further 27% said they would spend between EUR700,000 - EUR5 million on advanced Internal Rating Based approach for Basel II and the remaining 20% either have no plans or do not know how much they will spend in 2003.

In terms of priorities relating to aggregating counter-party exposure across their company, risk managers say that combining net outstanding positions across products ranked top of their list of priorities, followed by netting and offsetting positions. Third on the list is factoring credit limits across businesses, with daily valuation and mark to market of collateral assets in fourth; and finally, real-time tracking of margin exposure and intra-day positions coming in last.

When quizzed on operational risk issues, 32% say they are still actively analysing the impact of Basel II, while 24% are going for, or implementing, AMA methods. An additional, 24% already manage enterprise operational risk for cost efficiency and control reasons, while 12% do not believe Basel II will impact capital requirements due to operational risk. The remaining eight percent either do not yet know or are putting off analysis until the final Basel II regulations are enforced.

One in three of the sample estimate their operational risk management budgets from now until 2006 at between EUR1 - 10 million, while another third expect to invest less than EUR1 million. However, seven percent plan to spend between EUR10 - 50 million with the remaining 27% unsure of their exact budgetary requirements.

The approach to advanced operational risk is highly debated with 59% of those surveyed advocating a hybrid approach and 27% a bottom-up approach (such as reviewing data integration, operational risk analytics).

David Koenig, chair of PRMIA, says: "The results of the survey reflect the ongoing discussions and debates...the issues are not settled and such uncertainty is clearly affecting the planning of financial service firms."

The majority of respondent are moderately comfortable that they will be able to meet baseline criteria for compliance with the Basel Accord by 2007, but only 23 percent expect to be completely ready by 2006.

Mike Whitaker, managing director, trade and risk management, Reuters, says the results show that risk professionals are still somewhat undecided on their exact steps and spend. "However, Reuters is starting to see a number of banks allocating budget or spend to meet this demanding imperative," he adds.

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