Roadmap to Basel

Banks in the region are preparing for compliance with Basel II, an international standard for financial institutions

  • E-Mail
By  Peter Branton Published  June 25, 2006

|~|Tripathibody.jpg|~|Banks will be hiring more contractors for Basel II, claimed Infrasoft’s Tripathi.|~|The clock is ticking for banks worldwide to meet the requirements of the New Basel Capital Accord. More commonly known as Basel II, the mandate, which is sweeping across financial institutions all over the globe, aims to set the tone for mitigating risks and avoiding financial disasters. Deadlines for compliance are looming. Europe’s financial sector has until 2007 to finish its Basel II implementations while US-based banks have until January 2008. Although in the Middle East deadlines have not been set, banks in the region are also busily preparing their Basel II projects. Some of them have hired international consultancy firms to assist in their initial planning stages and oversee the setting up of the framework within the banks’ operations. The road to compliance, however, is rife with challenges. Cost, for one, is proving to be the biggest hurdle. “Basel II is a very costly project,” says Hanuman Tripathi, managing director, Infrasoft Technologies. There are two reasons for this, he explains. “One is it has to cover the entire operations of the bank. Therefore, if you are multi-geography and multi-product, then, obviously, the cost is more for the bank,” he says. “The second reason is that the expenditure is on both sides: the consulting side, which is very expensive especially if you are hiring from the big five IT consultancy firms, and from the IT side. So, both these sides put together makes for an expensive proposition,” Tripathi adds. Data management is also another major problem that the financial sector is facing today. Banks pursuing Basel II compliance are required to have at least five years data history for credit risk and three years for operational risk. Gathering this much data has been the biggest problem, according to Tripathi. “For risk and compliance, collating data, cleansing data and interpreting the financial perfor- mance data for the previous five years is one big challenge,” he elaborates. Stephen McTigue, solutions manager for SAS Institute in the Middle East, agrees, adding that while data management issues are inherent with any Basel II implementation — be it in the US, Europe or locally — the problem in the region is compounded by the fact that most banks have less advanced business intelligence systems and basic — or even non-existent — data warehousing infrastructure. “Generally, their [Middle East banks] business intelligence systems are lagging behind that of Europe. [And] whereas most European banks have had data warehousing projects implemented for some years, we have seen that banks here are either recently just starting it or planning to start it,” McTigue explains. As with any other organisations, managing data has been, and continues to be, a big problem among banks. Problems remain around data collection, cleaning and classification of data, storage of large quantities of data history such that it is available on demand, and finally working out how the internal data can be combined with relevant external data to provide meaningful analytics. The introduction of Basel II is simply forcing them to do something more proactive about it. “Having a well-structured data warehouse is key,” says McTigue. “The data warehouse should be customer-centric, such that it enables you to know your customer better and identify the potential risks and profitability of each client,” he adds. In a recent news conference, the UAE Central Bank revealed that the country’s banking sector is also facing a shortage of skilled manpower. M.N. Naveed Siddiqi, Basel II implementation supervisor, UAE Central Bank, told the press at that time that there was an evident scarcity of “several hundred risk management type and compliance professionals” in the financial industry. Tripathi agrees. “There are not enough people in the market space. There is a shortage of skilled people, especially those who understand banking domain and technology. You may get a lot of technical manpower who may not understand your business at all,” he says. “Banks will require business analysts, solutions architects, and people who are domain specialists, along with technology specialists,” he continues. “There is a lack of skilled people who have Basel II implementation experience,” confirms Venkat Raju, head of business operations at Edutech. “Most of the European banks have achieved this level of proficiency. However, banks here have not achieved that level of proficiency,” he adds. Raju says it can take banks between six months to a year to fully train their staff on Basel II, although several factors influence the duration of the training they need. “A lot depends on the readiness of the bank itself. For instance, is the bank Basel I compliant? It is also about getting your people up to speed in terms of understanding the Basel II risk framework. Once you have that understanding, you have to adopt that framework to how your systems weigh risks,” Raju explains. “To train people is fairly easy. It will probably cost them anywhere between US$3000 to US$5000 to train one person on Basel II,” he adds. Another solution to address the skills shortage is to outsource more projects, according to Tripathi. “Banks will be hiring more contractors for Basel II. There will be large-scale outsourcing that will happen,” he predicts. “In the past, when the requirements were limited and focused on core banking, the banks were hiring more people. Today, because the majority of a bank’s IT needs are driven by a set of time frames — which normally is a six-month, one-year or two-year kind of a timeframe — I think banks would rather do outsourcing, because at the end of a particular project there might not be a use of particular type or resource anymore,” he adds. “Rather than undertaking a lot of recruitment, the banks would rather be outsourcing these needs,” he states. While banks are struggling to come to terms with Basel II, they must look at their compliance projects as a driver to improve not only the risk management aspect of their business but their overall operational efficiencies. McTigue says this is exactly what Middle East banks are doing. “What Basel II is doing to banks in the Middle East, which is a little bit different from what we are seeing in the European banks, is they are using the opportunity that Basel II is forcing on them to look not just at the risk management from a Basel II point of view,” he explains. “They are looking at it at a broader, enterprise-wide risk management perspective. While Basel II is more around reporting of risk profiles, they are looking at also initiating projects integrated down to the branch level, to the operational aspect of risk, as well as the reporting aspect,” McTigue states. ||**||

Add a Comment

Your display name This field is mandatory

Your e-mail address This field is mandatory (Your e-mail address won't be published)

Security code