Banks need to focus on Pillars II and III says Celent

Banks may be over-emphasising the requirements for Basel II’s Pillar I, which sets the standard for risk-adjusted capital adequacy ratios, while overlooking the importance of Pillars II and III, which cover topics such as corporate governance, according to a report released this week by Boston-based research and consultancy firm Celent.

“Initially, banks focused on calculation aspects of Basel II, but along the way they found that regulators, at least in Europe, are beginning to focus not only on them coming up with the numbers, but looking at some of the inherent risk management practices within the bank,” said Cubillas Ding, a London-based senior analyst and lead writer of the report.

The report also found that a bank’s implementation of Basel II technology directly correlated with regulations of the institution’s home country. European banks have been quicker to adopt the new regulation than banks in the US, which has delayed its adoption of Basel II again.

The Netherlands and the Nordic countries are furthest in their progress, compared with southern Europe and smaller financial institutions in the UK that have recently accelerated their efforts in anticipation of the 2007/2008 deadline.

Furthermore, banks that are required to abide by Basel II are focusing on managing economic capital, which they view as a strategic advantage, while in comparison, non-mandatory banks are more concerned with regulatory capital, Celent found.

A corresponding trend shows that mandatory banks, on average, have been using different vendors to find the 'best of breed' components, while non-mandatory banks are using the technology that combines many functions into one package.

The firm also analysed the leading technology vendors and detailed each of their strengths in terms of Basel II functionality. In terms of asset size and number of installations at Tier I banks, five vendors came out on top – Paris-based Ubitrade Fermat, Toronto-based Algorithmics, North Carolina-based SAS, Pennsylvania-based SAP and Pennsylvania-based SunGard. Mumbai-based i-flex/Reveleus solutions has also gained a strong presence in the US.

Regional trends are also evident. In Asia, SAS, SAP and Fermat have the most clients across all tiers of banks. In Europe, it is the same set of players plus Algorithmics and SunGard. However, the top three vendors in north America are i-flex/Reveleus, Algorithmics and SunGard. “The point here is a lot of vendors are very close in terms of capabilities,” says Ding. “There isn’t an overall winner. It depends on the line of business of the institution and the technical architecture within the bank.”