October 06, 2006

The consensus among bankers and experts is that Basel II is the driving force behind enterprise risk management (ERM). By January 2008, Basel II guidelines will be required for U.S. institutions with $250 billion or more in assets or $10 billion or more in foreign assets. Global financial institutions are on an even tighter deadline, as they must comply by early 2007.

Based on three pillars -- minimum capital requirements, supervisory review and market discipline -- Basel II is not just a revision of capital adequacy standards, according to Guillermo Kopp, VP of TowerGroup's cross-industry practice. What really matters is transparency, he asserts. With transparency, Kopp says, credit rating agencies and the public will be able to make a judgment as to whether the bank is "clean," well managed, has adequate capital or has any outstanding issues. The bank is either "good" or "not good," he adds, pointing out that, the banks that are good in the eyes of the public will be more profitable.

"The impact will be with business partners and capital markets," Kopp adds. "Banks that understand the transformational opportunity and the value to the customers in building trust -- those are the ones that will reap the most gains," he says. "Banks that don't get it -- that don't embrace Basel II methodology -- can miss out."

"Everything in the future will have to take into account risk costs, especially with Basel II," says Wolfgang Porada, global head of sales consulting, risk, Misys Banking Systems. Whenever a bank makes a decision, they have to decide how the risk of that transaction contributes to the overall risk of the bank, he explains. Basel II requires a consistent approach, making it impossible for different silos to use different risk calculations and assessments, Porada adds, noting that banks are starting to realize this.

According to Brendan Nedzi, managing director at The Bank of New York, the bank's Basel II platform has freed up resources within the bank and made more, and superior, information available to management. "I'm not sure if we would have had the same efforts had it not been for the requirements," he says.

Risk and Reward: Enterprise Risk Management Technology