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UK banks lagging in Basel preparedness

11 April 2003  |  4069 views  |  0 London8

UK banks are in a poor state of readiness to meet the forthcoming Basel Accord, with data management issues and operational risk measurement the critical stumbling blocks, according to research conducted on behalf of technology consultancy Detica.

Metrica Research interviewed Basel II programme directors or equivalent at 55 UK banks. It finds just four percent are ready for the crucial first step - the completion of a data readiness audit - with almost half the sample stating that they had not started or were less than halfway there.

Banks need to have two year's worth of data for risk analysis if they are to meet the requirements for compliance by 2007. David Porter, head of financial services risk at Detica, says this isn't a good time to be dealing with data management and modelling: "The toughest hurdles of Basel II compliance are still to come with the Second and Third Pillars [supervisory review and enhanced disclosure to the market, respectively] so everyone needs to be moving forward now."

The research also shows that only 16 percent have a dedicated senior manager or director working full-time on compliance issues. Worryingly, over a third of Basel II compliance programmes have yet to start or are less than one year old.

The same people were also asked about the current ability of their organisation to quantify risk. There were marked differences between the credit risk and operational risk disciplines, with the latter much less understood. Whilst 84% of all banks said that they could quantify credit risk, this fell to just 42% for operational risk.

Just a quarter of those interviewed said that over 50% of their existing CRM infrastructure could be used towards a Basel II compliant datawarehouse, and only 18% intend to re-use existing CRM technology for Basel data analysis.

Detica's Porter says banks can save massive sums by re-using what they have built for CRM purposes. "The point is that there is a lot of overlap between those techniques, skills and technologies used for CRM, and those used for Basel II compliance. Both involve sophisticated analytical techniques. For CRM, it is about sales and marketing initiatives, and for Basel II compliance it means building a picture of credit and operational risk."

Banks which intend to build a separate Basel II data warehouse are missing a trick says Porter. "Risk analysis and customer segmentation for CRM purposes are really just two sides of the same coin."

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