Risky Business of Banks

Survey on issues and GAPs facing Asian banks in their preparedness for Basel II

Concern over profitability may explain the Asian banks’ hesitation in investing in solid risk management strategies. Based on a survey of 20 banks and interviews with 40 risk managers, the three most important themes discovered by Asian Banker Research are as discussed below.

An annual survey by Asian Banker Research on Basel II preparedness shows that only 20 Asian and Australian banks can be said to be building a full risk management infrastructure to be Basel II compliant by 2007.

The survey on risk management in banks in the region showed that despite the effects of the Asian financial crisis in 1997 and ratification of Basel II this year, many Asian banks are still taking a long time to implement their compliance strategies.

“We are seeing a separation between the leading banks and the rest of the pack,” said Mark Lee, research manager at The Asian Banker. “The banks that have not started their Basel II projects will clearly look very different from those that have from a risk management perspective.”
Much of the preparation for Basel II is technologyintensive and focuses on revamping their core banking systems, data warehouses,and query and retrieval capabilities.

The leading banks in the region are focusing mostly on improving economic capital management and risk governance control more than credit risk in their respective Basel II initiatives.

The key motivation cited by the 20 leading banks that are building their risk management infrastructure are to build economic capital management and risk governance control. This fact is surprising given that the reason for the failure of many banks during and after 1997 has been in credit risk management.

“Capital savings is a strong incentive for banks to implement solid credit risk infrastructure, but this is a long term view as it will take a few years to granularize the cost of capital required for the different types of credit risk taken by banks.”

More than 50 percent of banks surveyed indicated that they adopted an “enterprise-wide approach” to risk management, involving the entire bank, as opposed to a piece meal approach that focuses on different lines of business one at a time. Their success is dependent on the ability to meet and address organizational and operational challenges.

Much of the work in Basel II is focused on technology sophistication – the leading banks will be spending on average US$100 million each over the next 3-5 years in rebuilding core banking systems, data warehouses and query and retrieval capabilities.

“From our interviews, we estimate that banks in the region will be spending between $300 to $450 million in Basel II related activities in the next 3-5 years,” said Mr Lee. “By re-constructing the road-map that the leading banks are taking to build their risk management infrastructure, we estimate that banks will need at least five years to build an infrastructure from scratch.”


“We believe that besides the top Australian Banks such as ANZ, CBA, and NAB, Kookmin bank and Chinatrust are high along in road map than the rest of the banks in the region.”