New research from the Institute of Financial Services, IBM and SAP suggests that the banking industry is failling behind in preparations for the introduction of new regulatory capital rules under Basel II.
A clear majority of financial services firms believe the industry will fail to meet global compliance deadlines for capital adequacy when the new rules come into force in 2007. Only 38% of senior financial services executives at 35 European banks interviewed by the IFS believe the industry will be ready.
Indeed, only two-thirds of executives interviewed said that their organisations have agreed a business case and funding for their Basel II programmes and 43% said that they did not have clearly defined implementation strategies and plans at business unit level.
Implementation of the operational risk element of the Accord is identified as being the most difficult element. Although two in three executives say their companies can measure their operational risk, many doubt the robustness of their current systems in this area.
The next most significant obstacles are the ability to successfully coordinate a complex systems integration project, building a data model and database to support credit risk and developing the risk/quantitative models. Acquiring people with the necessary skills to carry out the projects was also highlighted as a key concern.
For credit risk, most institutions (93%) see it as vital to achieve at least some form of internal ratings based measurement from day one so they stand a chance of cutting their capital charge and to show the analysts that they have the adequate credit risk systems. For operational risk, despite the fact that only 46% of financial services executives anticipate their organisations will initially be using the advanced measurements approach of Basel II, by 2010, 83% expect to be doing so.
Overall, longer term the industry seems to be in favour of Basel II. Nearly half the firms interviewed expect the benefits to outweigh the costs, with one in five believing they will do so in a substantial way, whereas only 37% anticipate that the expense will exceed any advantages. Indeed, seven out of ten executives interviewed believe that they will be able to reuse the investment in data management for Basel II in other areas such as measuring customer profitability, CRM applications and economic capital models.