Processes and systems, along with the way risks are managed, are signifying a new era in the global financial services market, according to the results of an Ernst & Young poll of over 300 banks.
Patricia Jackson, Ernst & Young partner and former member of the Basel Committee, says: "Basel II is recognised as more than a regulatory requirement. Our survey indicates that senior banking executives are beginning to appreciate the long-term impact of Basel II on their own organisations and banking as a whole."
Over three-quarters of banks surveyed believe these regulations will change the competitive landscape for banking. Those organisations with better risk systems will benefit at the expense of those who have been slower to absorb change. Of all the respondents, 85% believe the economic capital would guide some if not all pricing. Greater specialisation is also predicted, due to an increased use of risk transfer instruments.
"The expectation is that the new risk information, required by Basel II, will change product pricing and portfolio management - with more loan trading and greater use of derivatives. The more sophisticated, larger banks that have the ability to leverage the new risk data will gain a significant advantage. There will be definite winners and losers," Jackson explains.
Over 70% of respondents believe portfolio risk management will become more active, driven by the availability of better and more timely risk information as well as the differential capital requirements resulting from Basel II. Pillar I
The majority of banks cited Pillar I challenges, which should be well advanced by now, as a key focus for 2006. This includes embedding Basel II into credit risk processes, model validation and technology planning. The survey results indicate that work on Pillars II and III lag even further behind.
Over half the respondents felt internal stakeholders, in particular senior management and front-office staff, require education on Basel II. Jackson continues: "With IFRS and Sarbanes-Oxley reporting initiatives largely behind them, Basel II is now higher on the executive agenda. While banks understand that disclosures could greatly impact how external stakeholders evaluate their business, only 25% of banks think they will be ready to meet Basel II disclosures."BaselAlert.com