Set for growth

Comment

Judging by the raft of technology firms that have set up shop in Asia over thelast two years, the region is definitely considered an area of high potential.Nowhere is this more the case than in China. With a line of foreign banks queuingup to get full access to the Chinese market come 2006, domestic banks are workinghard on improving their competitiveness, and this includes building up theirsystems capabilities. That in turn translates to significant potential for softwarevendors.

That’s not to say that China’s banks have an insurmountable disadvantage,or that they don’t currently have systems worth their salt. Indeed, themajor Chinese banks have implemented, or are in the process of implementing,sophisticated trading and risk management systems. In a best-case scenario, domesticinstitutions could leapfrog their Western counterparts in terms of risk managementtechnology.

Hampering that, however, is an absence of reliable data. Banks’ historicaldatabases are sketchy, while many company reports can probably best be describedas imaginative. Without reliable data, the systems cannot provide reliable analysis.That can only be solved through a concerted effort to collect robust data withinthe banks themselves, and most importantly, time. Unfortunately, with the marketset for full competition in just three years, time is a luxury the banks do nothave.

Elsewhere around the region, however, Basel II is at the top of the risk managementagenda, with the release of the final guidelines scheduled for the end of thisyear. A number of the larger Asian banks have been working to develop creditrisk solutions that comply with the broad requirements set out by the Basel Committee.But operational risk is an altogether more abstract concept. The most straightforwardapproach to operational risk requires banks simply to add on an extra 12% capitalcharge. As such, developing systems that measure and manage operational riskwould seem to be an obvious focus for potential capital savings.

Nonetheless, many of the region’s banks are still significantly behindtheir US and European counterparts in developing Basel-compliant operationalrisk procedures. One notable exception is Australia, where the top banks arein the vanguard of operational risk measurement. In our article on page S6, weexamine some of the proprietary solutions that have been developed and the third-partysystems available on the market.