IT is banks` biggest Basel II focus

By Iain Scott for ITWeb

Johannesburg, 25 Aug 2005

IT remains South African banks` biggest focus - in resources and expenditure - as they prepare to comply with the second Basel Capital Accord (Basel II), according to a study by Ernst & Young.

The study, "Basel II: Addressing the Challenges", found that South African banks are on par with their Asian-Pacific counterparts for the implementation of Basel II, and some local banks have already started implementing their action plans.

Basel II determines how much capital banks must set aside to cover unforeseen hazards. This it does by prescribing how to identify, measure, monitor and manage the full range of risks to which the banks are exposed. The greater the risk, the greater the amount of capital needed to cover it.

The study shows that banks have at least begun implementing action plans. All of the first tier banks (the top five banks in SA by assets) have started the process, while half of the second tier banks have done the same. More than 50% of SA`s banks are at least halfway through the implementation process.

The study also indicates that technology remains the single biggest focus, with some banks required to make major changes to their IT platforms. Even for those with compatible platforms, resources will be required to gear their systems for the introduction of Basel II.

"South African banks, in common with their Asian-Pacific peers, will grapple with data gathering for model development," the report says. "But South African banks have encountered fewer problems developing a methodology for internal ratings, and in integrating credit risks into their business processes than what their Asian-Pacific peers do."

Independent findings confirmed

According to the study, the first tier banks will need to spend considerable attention on getting their technology platforms ready for credit risk implementation. The second tier banks are better placed on credit risks because their credit processes are streamlined and usually support one business line.

"By comparison, the first tier banks are ahead of their smaller rivals in that their technology platforms are better geared to meet Basel II requirements in terms of both operational and market risks."

It adds that most of the first tier banks have completed their review of IT solutions, but the second tier banks have yet to begin.

"The second tier banks will not need longer than 12 months to implement the promulgated regulations, once these are finalised. The first tier banks, on the other hand, will need up to 18 months to do so."

The target date for implementation of the accord has been set for 2008.

The study confirms the findings of a global survey published in July by Accenture, Mercer Oliver Wyman and SAP. That study found that half of South African banks surveyed were using up to 80% of their Basel II budgets on systems and interfaces.

Thomas Balgheim, SAP senior VP for financial services, said at the time that data management remained the greatest single Basel II challenge, a finding in line with the Ernst & Young study.

The full report is available on the Ernst & Young Web site.