August 30, 2005

Financial institutions are progressing slowly in their Basel II compliance efforts. The majority of banks still are designing or building their Basel II solutions, including technology upgrades and organizational changes, according to a recent study by Chicago-based Accenture that surveyed 63 top-tier banks throughout Europe and North America. Just 5 percent of survey respondents say their organizations have implemented at least one component of their Basel II programs.

U.S.-based banks appear to be the farthest behind, notes Andrew Wilson, Accenture's managing partner for risk and regulatory management. "U.S. banks invested heavily in risk over the years," he says. "Now that they're in the midst of [Basel II implementation], they're realizing that it costs more than they thought. Their expectations to become Basel compliant were underestimated."

As a result, U.S. bank executives are taking more of a wait-and-see approach toward Basel II, Wilson continues. "This attitude is going to catch up with the U.S. banks eventually," he asserts.

Also, many banks are not convinced that investing in Basel II compliance will increase risk efficiencies, Wilson adds. Only 25 percent of survey respondents strongly expect enhanced process efficiency from Basel II, down from 43 percent in a similar study conducted last year. "Banks are truly seeing the costs now that they are in the resource-intensive phase of implementation," Wilson says. "Certain banks feel to some degree that they have already adopted some of these best practices without Basel."

Global IT Challenge

The IT component of Basel II initiatives is proving to be a particular challenge for banks, according to Wilson. Fifty percent to 60 percent of Basel costs sit in the IT function, he relates, and banks are finding the costs to be greater than expected. Of executives polled, 45 percent expect to spend more than 50 million euros (about US$61.7 million) through 2007 on Basel II compliance, up from 23 percent in 2004. Much of this spending is for building data warehouses to collect, scrub, sort and store data.

Basel II also is causing banks to rethink their operations. "Financial institutions have to look at their processes and controls," Wilson explains. "This is driving important organizational design questions - we're seeing the integration of finance and risk" because of Basel II, he continues. "People thought [Basel II] was just a risk-management effort involving IT. But they now realize there's a lot of integration involved."