All major Canadian banks passed a significant milestone Nov. 1, 2007 -- the end of the Canadian fiscal year -- by meeting the Office of the Superintendent of Financial Institutions' (Ottawa) deadline and becoming Basel II compliant. Only these large, internationally active banks are subject to Basel II compliance. The top six banks in Canada include BMO (Montreal; $359 billion in assets), CIBC (Toronto; $336 billion in assets), National Bank of Canada (Montreal; $124 billion in assets), RBC (Ottawa: $604 billion in assets), Scotia Bank (Toronto; $408 billion in assets) and TD Financial Group (Toronto; $403 billion in assets).
The question now is whether non-required -- non-Schedule One -- Canadian banks and banks in the United States, which have a later deadline to comply, will take advantage of any lessons learned from the Canadian banks that already have gone through the process.
"Canada has introduced a more thorough analysis of credit risk than we have seen in other geographies, requiring increased customization of the reporting application," according to David Coad, VP, Americas, for FRSGlobal (Brussels and London), which provides regulatory and compliance solutions to financial institutions and has been identified as a niche player in the Basel II solutions space by Gartner (Stamford, Conn.). "Requirements would often change following discussions with the regulator, and that puts time pressure on the project," Coad continues.
In December, FRSGlobal announced that four of the top six Canadian banks are using its regulatory reporting system to comply with the regulation. The company says it is now consulting with U.S. banking regulators to share the challenges Canadian banks experienced during their Basel II implementations. Large, internationally active U.S. banks are required to comply with Basel II by 2009.
"The process to become Basel II compliant is complex and can be extremely expensive," says Neil Beaton, president of Versabanq Innovation (London, Ontario). "It is commonly understood that the six major Canadian banks spent approximately CAN$1 billion on this effort."
Versabanq Innovation offers Basel II-compliant asset management software, Versabanq AMS. Versabanq's parent company, Pacific & Western, also has a bank charter in Canada and a banking subsidiary, Pacific & Western Bank of Canada ($1.5 billion in assets). The bank and the software provider jointly worked to develop the solution.
"We are very much a software development company with a banking license," Beaton explains. "These custom applications were designed to spec to meet all the requirements to run a full Schedule One bank." Pacific & Western became Basel II compliant in March 2007, according to Beaton.
U.S. banks should seek to become Basel II compliant as soon as possible to reap the benefits of lower capital requirements and the business benefits of reallocating the capital that Basel II compliance enables, Beaton continues, adding that Versabanq now is hoping to share its Basel II expertise with U.S. banks. "Early adoption of Basel II offers a competitive advantage in that resources that would otherwise be spent on a much longer and more painful road to compliance can be devoted to core business activities," he contends.