The Basel II Accord -- How it may benefit banks that comply

Compliance with Basel II will require increased capital commitments from all banks, as well as increased transparency and reporting to both regulators and the marketplace. To conform to these regulations, financial services firms are expected to rely heavily on new technology infrastructures.

The more successful banks are likely to secure considerable competitive advantage by reducing their regulatory capital requirements, thus increasing their capital. By the same token, financial services providers that fail to create the necessary IT environments will operate at a significant competitive disadvantage.

A survey recently commissioned by Oracle into European banks' readiness to comply with the Basel II accord has revealed some interesting trends. According to the survey, many factors beyond compliance with the Basel II Accord are driving the initiatives banks are pursuing for better risk and capital management along the regulatory requirement timeline. The survey results indicate that Basel II may herald a fundamental change in the way banking organizations view their data management needs and future investments in IT.

One finding of the recent Oracle survey is that banks are implementing software not only to meet the regulatory requirements of Basel II, but also to drive greater business intelligence and develop competitive advantage. Up to 89 percent of banks surveyed are planning to use the data for other business purposes, while 82 percent see their investment in software to support Basel II compliance as an opportunity to create strategic differentiators for their businesses.

Banks participating in the survey also revealed that Basel II is providing an opportunity to fundamentally overhaul their business processes. Fifty-five percent of banks interviewed for the Oracle study say that through their efforts to get ready for Basel II they expect to be able to merge their risk management and finance functions. Basel II compliance is clearly stimulating banks to think about how they could run their businesses more efficiently.

Oracle's market analysis indicated that preparations for the Basel II accord are well underway for many banks, with 79 percent opining that they will have implemented their Basel II programme at least one year in advance of the deadline, with 49 percent indicating that they will have finished their implementations two years in advance. Many banks see the advantages of the opportunities prompted by Basel II as too attractive to wait for the commencement of the accord.

Rather than viewing Basel II as just expensive operational programme, 92 percent, an overwhelming majority of the respondents to the survey, said that achieving return on investment (ROI) from any technology initiative to ensure compliance is important to them. This finding represents a change in the way banks view their expenditure on operational IT infrastructure, and a recognition by the banking community that the impact of Basel II extends far beyond compliance with a new set of industry regulations.

When considering both a technology vendor with which to partner and software solutions to implement around Basel II compliance, the factors which participating banks ranked most highly were reliability, customer focus, ease of integration, and flexibility.

Results indicate that the banks participating in the Oracle survey presented a positive perspective on the coming of Basel II, with most respondents commenting that the accord is likely to result in both better business decisions from more advanced information management and more efficient and effective allocation of capital.

Overall, the Oracle survey revealed that Basel II represents a massive opportunity for banking communities right across the globe.

Results indicate that the pressure on banks to centralize on one standard set of data as a consequence of Basel II opens up a wealth of additional possibilities, both for streamlining business processes and creating innovative new products.

In addition, banking operations that will run on a single instance of data as a result of Basel II compliance initiatives are able to interact with their customers at a much more intelligent and innovative level.

It appears likely that banks will not only adopt more sophisticated measures for managing credit risk, leading to more efficiency and stability in the market, but will use the opportunity provided by Basel II compliance measures to think about how they can build on their existing operations through the use of strategic differentiators.