Banks behind on Basel

24 February 2004

Banks behind on Basel

- Half are still in the pre-study or assessment phase

- Improved credit rating system seen as the number one Basel benefit

- Cost and timing the biggest concerns

As the clock ticks towards the implementation of the Basel Accord in 2007, requiring banks to be using Basel compliant systems and data for several years before then, a global survey by KPMG of 294 financial institutions in 38 countries has found that many banks are behind on their projects, with around half still only in the pre-study or assessment phase.

Around 10 percent of banks are still in fact establishing their Basel teams – and in the Asia Pacific region this climbs to as high as 22 percent. Only eight percent of banks have reached the testing and validation phase of their project on credit risk (although this rises to 15 percent in the Americas). Yet testing and validation is one of the key phases of the total overall project and one that often proves difficult to complete. Banks therefore need to be reaching that stage soon, at least for their main portfolios – but for a large number of banks, this does not look likely.

Although many banks are struggling to keep their Basel project on track, there is a clear consensus among them of the benefits of implementing the Basel requirements. The most widely perceived benefit was an improved credit rating system, followed by improved management of operational risk. A reduction in capital requirements was only the fourth most highly rated benefit.

Commenting on the findings, Jorg Hashagen, Head of KPMG’s Global Basel practice, said:

“It is concerning to see that so many banks are still at relatively early stages of their Basel programmes. The implementation date may be three years away, but many banks really need to be making more progress. Many may struggle to catch up, particularly in the Asia Pacific region.

“However, it is encouraging that there is a clear perception of the advantages to be gained from Basel, especially in its potential to enhance credit ratings and so produce a benefit that will have positive ramifications across the business. As banks have got further into their Basel preparations, they appear to have shifted their attention away from their initial focus on the possibility of a lower capital requirement. There is a realization that Basel is less about reducing regulatory capital, and more about running the whole business smarter.”

Approaches

In general, banks are further advanced in their credit risk programmes than on operational risk. While 46 percent of banks have reached the systems modelling stage or further on credit risk, only 33 percent have done so on operational risk.

Banks are also generally planning to take a more advanced approach to credit risk than operational risk – over a quarter are intending to take the most advanced approach to credit risk, while only 11 percent plan to do so on operational risk. In general, more European banks are planning to take advanced approaches to Basel, while more Asia Pacific banks are intending to take basic approaches. In the Americas, banks are polarised between the most basic and advanced approaches.

Benefits

KPMG’s survey found a generally positive view of the Basel requirements: 77 percent of respondents agreed that Basel would provide a better foundation for future developments in risk management, and over two thirds agreed that credit portfolio analysis would be easier. A clear majority agreed that both credit and operational risk practices would be improved overall.

However, a relatively low proportion of respondents (41 percent) agreed that there was the possibility of leveraging synergies between Basel and IFRS (International Financial Reporting Standards).

Barriers

The cost of complying with Basel was seen as the biggest barrier – perhaps not surprisingly, as half of respondents said that their total Basel budget was less than US$1 million. For a handful of banks however, budgets stretched to in excess of US$40 million.

Other widely cited concerns were lack of time, lack of data for operational losses, inflexibility of existing IT systems (a concern in Europe especially) and, in the Asia Pacific region primarily, a shortage of Basel experts.

-ends-

Notes to editors:

The survey was conducted between October and November 2003, among 294 institutions in 38 countries. These ranged from retail banks, to investment banks, cooperatives and savings banks, building societies, private banks, securities firms and universal banks.