A recent report by global independent research and advisory firm Financial Insights (an IDC company) surveyed senior executives in Asian banks responsible for coordinating their change management programs for risk management.

The report, entitled, "Basel II and Risk Management Survey of Asian Banks: Has a Risk Culture Taken Root?," unveils the extent of groundwork that has been laid for Basel II and illustrates how respondents see their risk initiatives driving value in today's increasingly volatile financial markets.

Financial Insights conducted executive-level interviews of over 2 dozen chief risk officers (CROs) and Basel II program directors. Participants originated from Australia, India, and the ASEAN region (Indonesia, Malaysia, Philippines, Singapore, Thailand and Vietnam), providing an excellent representation across the spectrum of risk management evolution in Asia. On the degree of headway these banks have made, the survey findings reveal that:

  • The Standardized and Basic Indicator Approaches remain the predominant capital frameworks adopted for credit and operational risks respectively;
  • Respondents are overwhelmed by the complexity of collating sufficient historical data for internal ratings and model development, with 35% possessing less than 2 years of robust data. Fortunately, others have made more measured progress and 65% of those advancing from standardized to IRB (internal ratings based) calibrations expect their capital positions to improve with better alignment of capital charges with economic risk;
  • Across the board, investment priority is skewed towards ascertaining that institutions meet regulatory compliance, though market leaders would ascertain that these risk measures are entrenched as part of their strategic processes.

Li-May Chew, CFA, senior research manager for Financial Insights Asia/Pacific Risk Management Advisory Service further notices that, "Cost is heavily focused on systems and interfaces. Within this category, 1 in 2 are buying standardized applications from vendors, whilst a quarter each are developing in-house proprietary solutions or re-using existing systems."
However, Li-May's cautionary warning here is that banks that deem their existing systems to be sufficient to cope with Basel II might have to augment enhancements later, while maintenance of in-house models could rob the risk management division's time and resources when they should be focused on interpreting findings and aligning their risk strategies. As such, banks modifying existing systems or developing proprietary solutions need to ascertain that inherent benefits outweigh that of off-the-shelf solutions.

When it comes to vendor offerings, principal vendors for which respondent banks are spending on point-solutions for credit, operational, and market risk management are SAS, SunGard, Algorithmics, and SAP. However, risk components are typically developed in silos and instead, generate additional strata of integration costs that partly diminish banks' enthusiasm for vendor solutions. As an alternative to various vendor applications, respondents preferred a comprehensive IT architecture that provides an enterprise-wide view of risk.

Using these survey findings as a guide, Financial Insights propose key prescriptions for banks keen to get their risk management implementation up to speed. Here, Li-May suggests that, "Banks transitioning from identifying challenges to exploring strategies and executing processes will enjoy greater success if adoption is supported by top-down commitment, leadership of an effective Basel II champion, and structuring of bank-wide compensation to correlate with risk objectives." Furthermore, building a solid data foundation is also unparalleled and banks should consider an inter-bank data-pooling bureau like the Pan-European Credit Data Consortium (PECDC) or Operational Risk Insurance Consortium (ORIC) in Europe to quickly generate robust data sets.

"Meanwhile, vendors speculating how best to profit from this increased risk awareness and corresponding investments in commercial off-the-shelf software need to either provide a complete risk management suite, or collaborate to fill up functionality gaps, and focus on providing newer, innovative technologies to keep in the forefront of competition," concludes Li-May.

For more information on obtaining this report - Basel II and Risk Management Survey of Asian Banks: Has a Risk Culture Taken Root?, (Financial Insights, Doc #FIN204546, December 2006) - please contact: sales@financial-insights.com.

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