A survey released recently by SAS, the leader in business intelligence, has revealed that seven out of ten large financial institutions in Europe are not managing risk effectively - and only 17% believe they will meet the Basel II deadline. While no major survey has been conducted in this country, SAS SA's Basel II specialist, Annette Hieber, believes the picture may be even worse locally.
"We believe in SA, the figure could be much lower. But the positive news is that there is still time for these financial services institutions to play catch up - provided they start getting their houses in order now," says Hieber, adding that these organisations need to address the problem of data quality, and take some basic initial decisions about how they are going to approach Basel II.
The European survey, polled during a summit held in London in September, brought together 45 leading organisations from across the European banking and financial services arena.
Over 80% of delegates felt risk management is more important than ever in the light of recent high profile accounting scandals. Some 90% of companies believed that poor management of credit risk is a real threat to their organisations, yet only 17% are confident that their organisations will meet the deadline of the Basel II Capital Accord.
Commenting on the results of the survey, Alastair Sim, marketing director, SAS UK said: "There will be real benefits for companies that work through the Basel II Accord successfully and lower their capital reserves through a better understanding of credit risk. Of the organisations attending the summit, nearly half expected to reduce their capital reserves, some by more than lb50 million, which means a lot more money is on the table to be actively working for a company - a necessity in the current economic climate."
The implementation of the Basel II Capital Accord recommendations set forth by the Bank for International Settlements (BIS) may be four years away, but financial institutions only have until 2003 to collect the three years worth of historical, operational and credit risk data needed to meet the requirements.
"Poor quality data is the major concern for South African financial institutions in complying with Basel 11," say Hieber. "The European survey also showed this to be the case. This worry was cited by 65% of respondents as their greatest concern.
"Companies live and die by the intelligence they can draw out of their data - but that intelligence is only as good as the quality of the data itself," she says. "'Dirty data' will not meet the quality required for accurate risk management assessments required by Basel II."
The Data Warehousing Institute estimates that poor quality customer data costs US businesses a staggering $611 billion a year, although the real cost is thought to be much higher. Yet most organisations do not fund programs designed to ensure data quality in a proactive, systematic and sustained manner.
Hieber concludes: "Both South African and European financial organisations have great concerns as they approach the Basel II deadline. In order to meet these agreements simultaneously, banks are going to have to focus on ensuring that the data they use to effect the calculations is scrupulously clean - today this is not the case."
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