Financial Insights estimates the Cost of Basel II adoption for banks in Asia/Pacific

A report by global independent research and advisory firm Financial Insights discusses the payoffs of Basel II compliance and quantifies the corresponding dollar spend on IT systems and interfaces in Asia. Entitled ‘Basel II, Chapter 1: The Cost of Compliance in Asia/Pacific’, the report also analyses some strategic considerations that provide the impetus for software solutions vendor selection.

“The allure of the Basel II accord is multifaceted, having evolved from a single, simplified step into a comprehensive program for risk improvement. Tenets of superior risk management include processes for risk identification, assessment of threats to solvency posed by the risks uncovered, and the discipline to manage the risks to prevent them from rising unduly high,” comments Li-May Chew, CFA and senior research manager for Financial Insights' Asia/Pacific Capital Markets Advisory Service.

Financial Insights believes that beyond just expectations of improvements in regulatory capital ratios, Basel II-conforming banks can expect to enjoy substantial operational benefits from more robust, risk-based pricing and economically rational capital allocation.

However, considerable uncertainty remains on the cost of compliance in Asian institutions. “In our recent interviews with banks, a number of players were unable to quantify the cost of their Basel II programs. However, guidelines by some large local banks indicated that they expect to spend in the region of US$30-60 million each in their compliance efforts,” stated Li-May.
Rough estimates of the aggregated cost for banks in the 12 Asia/Pacific countries for implementing their new Basel II framework is US$9.2 billion for the 5 years from 2002 to 2006, or 10–13 percent of their IT spend. Of that sum, more than half will be spent on IT systems and interfaces. The other half resides in the collection, collation, and cleansing of historical data to ensure consistency and to eliminate errors and duplication. Much of this has to be done in a manual, tedious manner.

Generally, banks that are building a single solution set and rationalising systems would be the lower spenders, while the those with higher expenditures are investing on design, specification, coding, and testing of dissimilar solutions for each of their multiple business divisions, such as the commercial, retail, and SME operations.

With such a massive financial investment, institutions need to ensure appropriate vendor selection, smooth integration of new solutions with their existing IT infrastructure, and adopt relevant tools to assist reporting functionalities and provide robust capital calculation, data capture, and cleansing. The technical architecture must build enough flexibility to incorporate evolution and keep its relevance over the years.

“While compliance will be challenging and necessitates substantial investments, rather than being an onerous regulatory burden, Basel II represents a significant opportunity for institutions to enhance risk management processes and models. Banks that seek wholehearted adoption will command competitive advantage over those who seek mere regulatory compliance,” concluded Li-May.

For more information on obtaining this report please contact Selina Ang at sang@idc.com or +65-6228-7717.