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The Basel II Capital Accord, already
implemented in numerous banks worldwide, imposes new regulatory methods
of calculating capital that apply to both banking and non-banking
subsidiaries of bank holding companies.
Compliance with Basel II will require
increased initial funding & investment commitments from all banks,
as well as increased transparency and reporting to both regulators and
the marketplace. To conform to these regulations, financial services
firms are expected to rely heavily on new technology infrastructures.
In particular, credit risk measurement and modeling of their entire
portfolio(s). More successful banks are likely to secure considerable
competitive advantage by reducing their regulatory capital
requirements, thus increasing their subsequent ROE. By the same token,
financial services providers that fail to create the necessary IT
environments will operate at a significant competitive disadvantage.
A survey commissioned by Oracle
Corporation into European banks' readiness to comply with the Basel II
accord has revealed some interesting trends. According to the survey,
many factors beyond compliance with the Basel II Accord are driving the
initiatives banks are pursuing for better risk and capital management
along the regulatory requirement timeline. The survey results indicate
that Basel II is heralding a fundamental change in the way banking
organizations view their data management needs and future investments
in IT.
One finding of the Oracle survey is
that banks are implementing software not only to meet the regulatory
requirements of Basel II, but also to derive greater business
intelligence and develop competitive advantage. Up to 89% of
banks surveyed are planning to use the data for other business
purposes, while 82% see their investment in software to support
Basel II compliance as an opportunity to create strategic
differentiators for their businesses.
Banks are revealing that Basel II is
providing an opportunity to fundamentally overhaul their business
processes. Most banks say that through their efforts to get ready for
Basel II they expect to be able to merge their risk management and
finance functions. Basel II compliance is clearly stimulating banks to
think about how they could run their businesses more efficiently.
Moody's KMV believes that those banks
that make the investment in their risk management capabilities for
economic decision-making, as well as pursuant to IRB, will be
significantly advantaged, relative to those who seek only compliance,
maximizing their ROI.
These investments enable banks to
realize more consistent profits and reduced volatility of credit losses
from existing business by taking a structured and consistent view of
risk management. In addition, banks may actually realize an increase in
profits in the form of lower provisions, consistent risk spreading,
more effective deployment of capital, and loss avoidance. In addition,
banking operations that will run on a single instance of data as a
result of Basel II compliance initiatives are able to interact with
their customers at a much more intelligent and innovative level.
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