Despite increased efforts, banks are facing an uphill struggle in preparing for the Basel II Framework, which sets new standards in risk management and capital adequacy, according to results of a survey released today by Accenture.
The survey queried senior executives responsible for Basel II compliance at 63 of the largest banks in North America and Europe to gauge the response to the challenges posed by the Framework, which strengthens existing capital rules by making them more risk-focused and by aligning regulatory capital levels more closely with economic capital to better reflect market risks.
Findings indicate that most banks are finding implementation tougher than anticipated and are less certain about the benefits of compliance than last year, when Accenture conducted a similar survey.
Nevertheless, the vast majority of respondents said that the regulation is a catalyst for moving toward a more risk-based culture – a key objective of the Framework – by focusing senior management more closely on risk practices and on securing funding for necessary technology.
Consistent with findings from last year’s survey, European banks are still much further along the Basel II implementation cycle than those in North America, perhaps reflecting a degree of complacency in light of last year’s decision by U.S. regulators to delay application of the Framework domestically. The Basel II rules are expected to take effect globally in January 2008, although in the United States only the largest internationally active banks are required to comply.
“We were expecting more progress than we found over the last 12 months,” said Paul Cartwright, managing partner of the Finance & Performance Management practice in Accenture’s Financial Services operating group. “On the other hand, we’re seeing a greater focus on moving forward on compliance, especially in North America. That’s good, because the survey indicates that complying with Basel II is more difficult than most bankers thought.”
The survey found that almost half (45 percent) of the executives interviewed said they expect to spend in excess of €50 million through 2007 on Basel II compliance, up significantly from 23 percent in last year’s survey. Banks now have a much better idea of their total cost of compliance than they did last year, with only 10 percent of survey respondents saying they remain unsure of the total cost, compared with 29 percent last year.
Going beyond simple compliance, half (49 percent) of surveyed banks reported plans to leverage their Basel II capabilities with moderate or considerable further spending in more strategic solutions such as embedding best practices across their risk functions. Seventy-nine percent of respondents said they expect Basel II to improve their banks’ capital positions only slightly or not at all, an increase from 73 percent in last year’s survey.
Reflecting the goal of the new rules to increase bankers’ focus on managing capital for business rather than regulatory needs, about half (48 percent) of respondents said that the Basel II implementation process has improved their enterprise-level economic capital framework. Asked for examples of Framework benefits, the greatest number of respondents – 83 percent – cited two areas equally, improved capital allocation and closer alignment of the risk and finance functions.
“We were surprised to see such high expectations for integration of risk and finance, given their traditional separation,” Cartwright said. “This should improve the quality of the data that support decision-making, particularly through a more risk-sensitive approach to profitability analysis and capital management.”