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According to the latest online survey conducted by Ernst & Young's Economic Intelligence Unit that polled 307 banking executives around the world, banks are starting to implement new systems, process and risk management approach.
The survey indicates that banks are finally beginning to appreciate the long-term impact of Basel II.
Over 75% of the executives surveyed believed the Basel II regulations were effectively changing the competitive banking landscape in favour of those banks that have better risk management systems.
A further 85% of the respondents said that they believed that economic capital would guide some, if not all, pricing.
Greater use of derivatives
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," says Patricia Jackson, partner at Ernst & Young UK and former member of the Basel Committee. With this in mind, Basel II is expected to encourage the trend towards consolidation in the sector.
Bankers are also said to expect greater specialisation in the sector due to increased use of risk transfer instruments.
Furthermore, almost 70% of respondents believe that as a result of Basel II, portfolio risk management will become more actively driven, primarily by the availability of improved and timely risk information as well as the differential capital requirements of the new legislation.
SA well ahead of international counterparts
The only concerning element of the survey is that the majority are struggling with Pillar I challenges; this is worrying given the fact that most banks should be well past this stage if they have any hope of meeting the Basel II.
Although the deadline varies from country to country all the deadlines fall between 2007 and 2008. The survey revealed that there was much work to be done with regards to Pillar II and III processes as well.
The survey only uses chief executives, chief financial officers and chief risk officers as respondents. The geographic composition of the respondents was 40% from Europe, 25% from North America, and 24% from Asia and the Pacific.
It is important to note the majority of questions in the survey contained structured answers from which respondents selected the most appropriate answer.
Interestingly, SA banks seem to be well advanced in their Basel II integration processes when compared to their international counterparts, while 25% of banks globally think they will not be ready to meet Basel II disclosure requirements, almost all SA banks think they will be ready.
Top banks
"In a survey we conducted earlier this year on the SA banking sector, we found that SA banks were well advanced in their Basel II implementation processes with most progress made by the top five banks," says Anton de Souza, a partner at Ernst & Young SA.
De Souza adds: "This is largely due to the existence of the Accord Implementation Forum a committee established under the guidance of the Reserve Bank to help with the implementation of Basel II."
All of the Tier I banks (the top five banks in South Africa by assets) have started the process, while half of the Tier II banks have done the same.
The survey indicates that more than 50% of South Africa's banks are at least half way through the implementation process.
