Banks falling behind on Basel II

Banks falling behind on Basel II:

Many banks are falling behind on their projects to implement the Basel II Accord on capital adequacy (the amount of capital required to be held to meet risk), according to a global survey by KPMG of 294 financial institutions in 38 countries. Around half are still only in the pre-study or assessment phase. Implementation is due in 2007, but requires that banks are using Basel compliant systems and data for several years before then.

Amongst UK banks, progress is generally greater - but they have concerns around the cost of implementing Basel, lack of IT flexibility, and uncertainty over how the regulator will be assessing the robustness of the systems they have developed. Many banks are also concerned about the disclosure requirements under Basel. These concerns reflect both the considerable amount of information that will need to be published, and the danger of misinterpretation by the markets.

Globally, around 10 percent of banks are still 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 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 amongst them of the benefits of implementing the Basel requirements. The most widely perceived benefit is 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."