The Hindu Business Line : Seven issues that will keep banks busy on the Basel front

Opinion - Interview
Web Extras - Banking
Money & Banking - Insight
Columns - Account Speak
Seven issues that will keep banks busy on the Basel front

Some of the benefits that can be expected from a well-implemented Basel programme are competitive advantage through better pricing, access to cheaper funds through improved credit rating, greater transparency and, above all, a well-oiled risk management system.

Ms Saloni P. Ramakrishna, principal architect (risk and compliance solutions), i-flex Solutions.

Basel II may sound like the name of a movie sequel. In banking circles, however, the phrase evokes a big shift that is fast approaching.

For starters, ‘Basel II Framework’ refers to a document titled ‘International Convergence of Capital Measurement and Capital Standards: A Revised Framework,’ released by the Basel Committee on Banking Supervision (BCBS) on June 26, 2004, and supplemented in November 2005 by an update of the ‘Market Risk Amendment.’

This document, offers “a new set of international standards for establishing minimum capital requirements for banking organisations,” elucidated Mr V. Leeladhar, Deputy Governor, Reserve Bank of India (RBI), in a September 2007 speech (http://rbidocs.rbi.org.in).

“It capitalises on the modern risk management techniques and seeks to establish a more risk-responsive linkage between the banks’ operations and their capital requirements. It also provides a strong incentive to banks for improving their risk management systems.”

Why is it urgent now to be talking about Basel II implementation? Isn’t there a possibility that things will be postponed once again, one may wonder? “The ‘urgency’ is more from the competitive angle,” says Ms Saloni P. Ramakrishna, principal architect (risk and compliance solutions) in i-flex Solutions.

“This year most jurisdictions are trying to achieve the Basel II benchmark, with the exception of China, largely adopting a standardised approach,” she adds, in the course of a recent e-mail and telephonic interaction with Business Line. “RBI has in its wisdom designed a three-track approach with the first track being applicable for internationally active banks.”

This is the segment that would face the toughest competition from banks operating in other jurisdictions, reasons Ms Ramakrishna. “Setting a timeline that is in sync with most of the other countries helps these banks to compete for business as Basel-compliant banks alongside the other global banks, and thus ensuring a level-playing field.” The timeline has already been extended once and a further extension is not sound from a competitive landscape point of view, she opines.

“The bigger question to my mind is not so much ‘when’ as ‘how’. Banks need to plan to get it right, by understanding the Basel programme as a strategic initiative that will yield multiple benefits over time. It, therefore, deserves an integrated, enterprise approach.”

Excerpts from the interview:

How prepared are our banks to face the new scenario?

Adopting a standardised approach is much less demanding than the internal ratings-based approach. Banks have been preparing themselves for over one year now, if not more; so, meeting the deadline from a ‘tick in the box’ point of view is not so difficult.

The problem is that this approach would take the banks sooner to the drawing board than they can envisage. This is what is happening in some jurisdictions in the Asia-Pacific; the early adopters of Basel initiatives looked at Basel II as one that had to satisfy submission of some reports to the Regulator and that is that.

As a result, today, there is talk of a second wave of Basel II in some of these jurisdictions (Australia, for example), where a more fundamental and comprehensive approach is being planned. They now realise that the Basel II programme is much more than just regulatory reporting.

What are the key challenges?

Basel compliance is a challenging task at multiple levels in the bank. Some of the important ones are data health, obsolete/siloed technology, scarcity of skilled resources, costs, possible requirement of additional capital, adequateness of rating agencies and their scope, etc.

The biggest challenge of all is that compliance is not stationary; it is dynamic and will remain so and banks that are blind to this reality will incur huge costs and not all of them just monetary.

Are there takeaways for Indian banks from the experience of institutions in other countries?

There is what one would term ‘regulatory fatigue’ in the system and this is across jurisdictions. Multiple regulations with overlaps both in content and time lines are expected to be adhered to by banks in addition to managing an extremely competitive environment. The commonsense response therefore will be to find commonality across these regulations and take a strategic approach rather than a tactical one.

In our interactions across the globe we found that banks that look at the Basel programme in a holistic manner and focus on the foundation as much as on the superstructure have benefited far more. Foundation is the de-glamorous job of getting the raw data right.

The second critical point is the approach taken — it is not necessary to climb the IRB (internal ratings bank) wagon in a hurry. It is more important to get the base right and go standardised in the interim while fortifying the data, the processes and the models along the way.

It is not an exaggeration to say that a properly done standardised approach with a clear plan of upgrading to the rating-based approaches over time is more beneficial, both from a bottom line perspective as also from a strategic perspective, than a hurriedly done IRB.

Do you think there will be perceptible changes in the way banks function (or the way they are perceived by customers) after full-scale Basel implementation?

That is the expectation though it will take some time to be felt. That is because every one is busy in the process of getting it done. Some of the benefits that can be expected from a well-implemented Basel programme are competitive advantage through better pricing, access to cheaper funds through better credit rating, greater transparency and, above all, a better and well-oiled risk management system.

What does 2008 look like for banks in the Basel context?

I’d say, from Basel compliance point of view, that in 2008 the following seven issues will become ever more important and if done right will help to future-proof and shape the risk approaches in times to come.

Data cleanup will be the sine qua non: Maybe it’s not glamorous, but its importance will be recognised and greater efforts will be applied to ensure data health. There will also be greater attention to data planning to ensure meeting of evolving compliance requirements.

It’s an evolution and there’s more to come: Multiple regulations with overlapping content and timeframes are a reality. Basel compliance requirements themselves have already moved through two incarnations.

Additionally, regulators are now tackling the Pillar II and III requirements. While the result of Pillar II in combination with Pillar I will be an integrated version of risk and the capital adequacy, Pillar III will lead to both integrated regulatory reporting as well as to comprehensive market disclosure.

Peer pressure continues to propel activity: Competitive and peer pressure will continue to drive banks to advance and improve their risk and compliance approaches and systems. Regulators will keep pace as well, instigating regulations following common market practice and raising the compliance bar for all, including the smaller and less-pressured financial institutions.

Built-in flexibility is mandatory for future-proofing compliance initiatives of banks: As already stated, the only constant is change and the only solution is flexibility in systems, processes and attitudes. A bank with built-in change management capability will be able to manage the waves of requirement changes and, in some cases, improve the bank’s competitive standing because of it.

Transparency will be the norm: As regulatory fatigue increases and regulators increasingly demand evidence, banks will move towards transparent systems. Now banks not only have to follow the guidelines but also show that they have done so. The days of ‘black box’ are over.

‘Modular yet integrated in an enterprise-wide approach’ is the only long-term solution: With a long-term view, a modular yet integrated, flexible and enterprise-wide approach provides the most cost-effective answer while ultimately smoothly accommodating the changing compliance environment. Gartner’s figures on wasted investments provide an indicator of the importance and budget implications of a long-term view.

More investments will be made: And investments will continue. While Celent estimates that IT (information technology) spending growth in Asia-Pacific on risk systems of 13 per cent will outstrip America (8.3 per cent) and Europe (3.3 per cent), Deloitte places increases in expenditure on internal control between 2006 and 2010 at an average of 20-30 per cent.

While banks in Asia-Pacific making sizeable investments is a given, the challenge is in ensuring that it is well thought out to reap the long-term multiple benefits.

As someone who has watched the banking industry over the last two decades, what do you see as the healthy trends currently happening?

Banking industry has come a long way for the better, for sure. The range of products, customer convenience propelled by technology and competition, the shrinking of geographic borders, reduction of protectionism, the increasing transparency of the system are just a few of them.

Coming of age of the risk management practices is what has lagged behind and hopefully the spate of risk and compliance initiatives by the regulators and the market will soon right this situation.

How do you see the Basel phase of Indian banking?

What Basel II has initiated is a journey not a destination in the risk management continuum. It is a journey of fine-tuning risk management practices, risk sensitising, becoming aware of the risks that are carried in the bank’s books and aligning capital accordingly. Above all, a journey of inculcating a positive risk culture in the organisation.

I call it a journey because banking is a dynamic industry: new products, new geographies, new collaborations, new organisation structures, new and more stringent regulations and so on will happen on an ongoing basis.

Flexibility and alacrity with which banks can respond to this ever-changing canvas with well-aligned risk management practices and supporting technology will separate the winners from the ‘me-too’ participants.

Bio: Ms Ramakrishna also heads the business development initiatives of the leading edge risk and compliance stack of solutions from Reveleus and Mantas for Japan and Asia-Pacific, in i-flex Solutions, a global software solution provider focused exclusively on the banking and financial services Industry.

An MBA in finance, her banking experience spans areas such as credit and asset-liability management. As a banker, Ms Ramakrishna was part of policymaking bodies, both at the banks she has worked in, and on industry-level committees. Equally comfortable with both corporate and retail banking she brings rich hands-on experience of real-life banking to the technology platform.

Ms Ramakrishna joined the Reveleus group of i-flex Solutions in 2000. In her seven years with Reveleus she has led the design, development and implementation of its risk solutions. She headed the Reveleus Solutions project at the International Monetary Fund, Washington DC. For the last three years she has been exclusively focusing on the Japan and Asia-Pacific markets, architecting enterprise analytics solutions for banks in the region.

D. MURALI

http://AccountSpeak.blogspot.com

More Stories on : Interview | Banking | Insight | Account Speak

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Stronger ties

End of ceasefire in Sri Lanka — Will it lead to peace?

Don’t stub out listing gains with a greenshoe

Seven issues that will keep banks busy on the Basel front

Lean learning

Population stabilisation

Bank on consensus

Farm economy

Tata’s Nano