Canadian banks may head of the class when it comes to Basel II preparation, but even they might be behind on their homework.
A report released from Ernst & Young suggests that banks around the world, including Canada, have underestimated the complexity of Basel II, a banking accord created to harmonize the way the institutions and their regulators approach risk management.
The problem that has caused banks the most grief is that they’ve never had to take on a project of Basel II’s scope before, said Paul Battista, a partner in Ernst & Young’s financial services advisory practice in Toronto.
“Because of the myriad systems that the banks have developed over the years and because Basel is just so all-compassing,” said Battista, “they have continually found the tentacles of Basel reaching into more areas than they expected.”
While financial institutions are among the biggest users of new technology and usually command the largest budgets, much of their data is kept in legacy architecture. This can be a problem when you need to pool data towards a common goal and in a common format.
Moreover, banks have no blueprint to fall back on. Privacy requirements like PIPEDA and accounting regulations like Sarbanes-Oxley require a degree of reporting and a revise approach to data maintenance, but neither require the rigours of Basel II.
“It’s probably the first project of its kind to be so comprehensive in its few of data quality and data access issues,” said Battista.
“They looked around and said, there isn’t anything that looks like (Basel II). The closest they could come to it were financial reporting systems, but even that wasn’t a perfect fit because of the risk data and some operational data that even the financial systems don’t pull up.”
Surprisingly, there is no uniformity of approach to Basel II. There are numerous IT companies offering solutions to help banks meet the accord’s requirements, but Battista said he knew of no vendor that had more than one client.
“As advisors to the market, we expected that given how close the community was, once one of these vendors locked in on a bank, the other vendors would follow suit, but it’s actually been quite the opposite,” he said.
In a global banking study conducted by Ernst & Young, more than half of the respondents said they felt that employees, particularly senior management and front-office staff, require training for Basel II. Only about 25 per cent of respondents said they will be ready to meet Basel II disclosures.
The accord will be implemented in more than 100 countries by 2008. Despite the setbacks, Battista said he believes Canadian institutions will be ready.
However, there will be new challenges when data reporting systems finally go live. “They’ve tried to anticipate what the impact will be on risk reporting (and) regulatory capital applications. None of that will fully be known until these systems start churning out the numbers,” he said.
The Office of the Superintendent of Financial Institutions Canada (OSFI), the body responsible for Basel II oversight in Canada, was unavailable for comment at press time. In a speech give in Washington, D.C., last month, Superintendent Nicholas Le Pan said, “One of the biggest challenges in implementing Basel II is dealing with the uncertainty of impacts. It is not possible. It is not possible to precisely plan the impacts, push the ‘green start button’ and expect that there will be no surprises.”
A spokesperson from the Canadian Bankers Association was also unavailable for comment at press time, but said in an e-mail: “This is a very complex project and Canadian banks are working intensely towards meeting the targeted Canadian implementation dates. We continue to work collaboratively with our domestic supervisor, the Office of the Superintendent of Financial Institutions, to ensure the new framework is implemented consistently in Canada.”
The spokerperson defined that CBA’s role in the process as “to facilitate dialogue between our members and act as a point of contact in dealing with external organizations.”
Battista expects Canadian banks will fare better than most. The accord will also cause fewer economic ripples in Canada than it might in the U.S.
“There will certainly be some new information, better information, that the banks will have that will allow them to be much more effective in certain sectors like real estate (and) residential mortgage lending,” he said.