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Poor quality data cited as key hurdle in gaining Basel II compliancy

Seven in ten European financial organisations are not managing risk effectively - SA picture could be worse
By Annette Hieber
Johannesburg, 15 Jan 2003

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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SAS Risk Management for Banking

SAS Risk Management for Banking provides the most complete credit risk-modelling environment to support an advanced internal-ratings-based approach. SAS is the only provider that has a proven track record in both the assessment of creditworthiness of various types of counter parties (retail, corporate, etc), as well as credit risk on a portfolio level. SAS is the only vendor that offers a flexible environment for credit risk management where different approaches (CreditMetrics, Creditplus, RAROC and RAPM, regulatory requirements as laid down in the New Capital Accord, etc) can be implemented and simultaneously evaluated. Competitive products focus on only one of the many different approaches.

In addition to providing the broadest range of risk-modelling tools, SAS is the only vendor to provide a complete environment for credit risk management, which includes data collection and storage, advanced credit risk analytics for the internal ratings approach, as well as a reporting environment that enables banks to provide reports documenting their risk exposure as per Basel II requirements.

The Basel II Capital Accord

The Basel Committee is a committee of central banks, bank supervisors and bank regulators from the major industrialised countries that meets every three months at the Bank for International Settlements in Basel, Switzerland. The committee determines broad policy guidelines and regulations that each country's banking supervisors should follow and apply.

The New Basel Capital Accord, or "Basel II", is an update of the old Accord ("The 1988 Accord"), which was adopted by over 100 countries worldwide.

The new framework is intended to improve the soundness of the financial system by aligning capital adequacy assessment more closely with the underlying risks in the banking industry, providing incentives for banks to enhance their risk measurement and management capabilities, and enhancing market discipline. It further seeks to maintain the current overall level of capital in the system and enhance competitive equality. Basel II, when finalised, will establish the basic capital frameworks for committee member countries and will enforce that banks have a risk management strategy.

The survey

The survey was conducted among delegates attending The European Executive Forum. In total, the sample size was 95 respondents comprising of 45 different organisations across the European financial sector. The survey questions were processed by Harpers Av Limited (www.harpersav.com).

SAS

SAS provides software and services that enable customers to transform data from all areas of their business into intelligence. SAS solutions help organisations make better, more informed decisions and maximise customer, supplier and organisational relationships. Solutions from SAS, the world's largest privately held software company, are used at more than 38 000 business, government and university sites around the world. Ninety-nine of the top 100 companies on the Fortune 500 - and 90% of the Fortune 500 overall - rely on SAS. For 25 years, SAS has been giving its customers The Power to Know. For more information, visit http://www.sas.com/sa.

Editorial contacts

Lianne Osterberger
Citigate Ballard King
(011) 804 4900
lianne.osterberger@citigatesa.com
Michelle Chettoa
SAS Institute
(011) 713 3400