The great Basel II debate continues

A fresh vision

The recent OpRisk (ORM) Regulatory Challenges survey conducted by OpRisk & Compliance magazine and Protiviti indicates Global Regulators have received a mixed bag of commentary – clearly achieving some successes as well as having clear areas for improvement. Survey responses were submitted by financial services professionals from more than 30 countries, representing the full spectrum of financial services firms, both in terms of size and business activity. As regulators proceed with the enactment of the Basel II Accord within their jurisdictions, respondents desire greater clarity, communication and continued momentum in implementation.

While historical surveys indicated loss data collection was at the forefront of concerns, this year's respondents are more focused on analytics and assessment. Nearly two-thirds of this year's respondents identified business environment/control analysis as one of their top three areas of focus in 2006 – with one in three citing this as their #1 initiative. Key risk indicators (KRIs) captured nearly 46% of the total vote, while data integrity (40%), scenario analysis (27%) and internal loss data (26%) were also identified by respondents as one of their top three initiatives. Reflecting the continuing maturity of ORM initiatives, external loss data and home-host issues were identified by fewer than 5% of respondents as a primary focus.

These same ORM programs are also the source of regulatory concerns in the coming year, with 60% of the respondents indicating that business environment/control analysis is a critical regulatory focus for their organisation, followed by data integrity & validation (46%), and KRIs (40%). There is a clear call to action requesting regulators to work closely with the industry in better defining these areas – both to benefit operational risk management as well as to ensure compliance.

In general, respondents were neutral to positive across the board on their regulator's approach to Basel II implementation. Regulators generally were awarded higher marks for external communications and industry outreach, but received lower marks for "one-on-one" communication with their bank "clients". Nearly half of the respondents were satisfied with the ability of their regulators to work well with other regulators (46%), with only 1 in 3 respondents satisfied with their regulator's understanding of operational risk and communication with industry bodies. Points of dissatisfaction included supervisory communication regarding Basel implementation plans (29%), and the quality/helpfulness of ORM discussions with regulators (27%).

Home-host arrangements appear more challenging. When asked to rate their satisfaction with these arrangements, more than half the respondents were neutral to dissatisfied with regulatory performance in the handling of home-host arrangements, with the highest dissatisfaction ratings scored for regulatory handling of Pillar II for operational risk (38%). Certain respondents commented on the need for establishing preliminary visits as soon as possible to ensure proper understanding of each institution's framework. Netherlands' De Nederlandsche Bank rated the highest scores from its constituents, with 87% of respondents citing them as very good or excellent in handling operational risk implementation.

In responding to the recent decisions by the US regulators to further delay implementation of Basel II, respondents were most concerned with potentially increased difficulty and cost for US firms to comply with Basel II requirements, and potential delays in the development of ORM practices given the lack of immediacy in implementation. More than one in three respondents anticipates that the US regulatory decision is expected to result in delays in Basel II adoption in other countries. Several survey participants advised regulators "to get a move on" – noting frustration with repeated delays and lack of clarity on acceptable methodologies among jurisdictions.

When asked about the challenges facing their regulators, many respondents focused on the skills and capabilities of their regulators to implement Basel II. Leading concerns among respondents included education and training of examiners (55%), understanding of the subject matter and industry (46%), and hiring and retaining qualified examiners (44%). Respondents commented on the need for more examiner training as well as greater responsiveness to bank concerns in that regard.

In conclusion

This year's survey on OpRisk Regulatory Challenges offers clear insights into areas of continued improvement in regulatory support. When asked what advice they would give to regulators as they move forward with Basel II implementation, responses strongly encouraged open dialogue, greater clarity around requirements, and continued momentum in developing risk management practices.

Partnership is critical for ORM to strengthen its position as a risk management discipline.

Protiviti (

www.Protiviti.com) is a leading provider of independent business and technology risk consulting and internal audit services. Protiviti helps clients identify, assess and manage operational and technology-related risks encountered in their industries, and assists in the implementation and the processes and controls to enable their continued monitoring. Protiviti, with more than 45 offices in North America, Europe, Asia and Australia, is a wholly owned subsidiary of Robert Half International Inc. (NYSE symbol: RHI). Founded in 1948, Robert Half International is a member of the S&P 500 index.

For more information on the results of this survey, please contact the authors at [email protected]

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