Basel II replaces Basel I, which was introduced in 1988 with simple rules for banks' capital adequacy.
The new accord uses a more risk management approach by applying minimum capital requirements to bank risk by seeking to create more rational and wider differentiation of types of credit risk.
In terms of the framework, banks are encouraged to place emphasis on risk management and to strengthen their risk assessment capabilities.
Banks are also required to have capital cover for losses arising from operational risk.
E&Y surveyed 12 South African banks, both locally-owned and foreign-owned in the second quarter of 2003. The banks surveyed accounted for 86% of the total South African banking industry's assets of R1.23 trillion.
The results showed that South African banks were ahead of their Luxembourg competitors, where E&Y conducted a similar survey in the second half of last year.
The South African survey used the same methodology as the Luxembourg survey.
In terms of organisational structure, all of the participating banks have a credit and operational risk management function. A key challenge will be to gather the three years of loss data required for the advanced operational risk method by 2005, with just on half the participants unlikely to do so.
Identified problems areas are data gathering, budget allocation, model building, human resources and integration capabilities.
The survey highlighted the need for more clarity on the role of the regulator regarding the competence and readiness for implementing Basel II in a fair and consistent manner.
Some banks questioned the implementation of developed world standards in a developing country, and believed the base capital requirement should be lowered to 8% from the current 10%.
Certain respondents also said the upper limit of R460m annual turnover for the definition of small and medium enterprise (SME) was inappropriate in South Africa, where generally speaking SMEs have a turnover threshold a tenth of the European standard.
In addition, banks said the South African credit rating industry did not have sufficient depth, which is why the vast majority of SMEs did not have a credit rating.
This meant that the implementation of the Financial Services Charter, which was signed last year, and which emphasised more access to bank credit for SMEs, would be problematic given the higher capital requirements for lending to SMEs.