Basel II to pose major challenges to banks in the region, says expert

The draft of the New Basel Capital Accord, issued by the Central Banks of the G10 countries, is a more complex yet more flexible and risk sensitive system than the current 1988 Accord. The new Accord is expected to improve safety and soundness in the financial system by placing more emphasis on banks' own internal control and management, the supervisory review process and market discipline.

While the 1988 Accord has a "one-size-fits-all" approach and a broad brush structure, focusing on a single risk measure, the proposed Basel II is more comprehensive and more sensitive to risks and offers incentives for better risk management. It is a complex, multi-level approach to managing risk and was developed for a safer, sounder and more efficient banking system, at a time when risk management went through a major evolution.

Addressing more than 380 bankers and financiers attending the conference, Wissam Khoury, Risk Management Specialist from Reuters - a leading global provider of financial information, news and technology solutions, will discuss how the banks in the region need to act now. "They need to start implementing systems and collecting data that will help them comply with Basel II as soon as possible." He adds: "When finalised, the new Accord will establish the basic capital frameworks for the G10 countries and is also expected to be adopted by regulatory bodies across the world, as is the case with the current Accord."

Central Banks in the Arab region, and specifically in the Gulf, are expected to make Basel II mandatory, in order to protect their banking industry, especially since the International Monetary Fund and World Bank use the Basel Committee standards as a benchmark in conducting their missions. Banks also tend to abide by this industry standard willingly in order to increase their external rating and to be internationally accepted.

Wissam Khoury adds: "Complying with Basel II is difficult now, but fundamental changes on the 1988 Accord were needed to respond to technological developments and new instruments in the market. There are different methods to measure data under Basel II and they could be very difficult and complex."

The banking industry is only now acquiring the technical ability to measure credit and operational risk in the manner envisaged in the new proposal.

At the moment, the two main challenges posed by Basel II are collecting the data and measuring the data.

"How to measure risks is the debate that Basel II is going through with supervisors around the world. The Committee still needs to come up with the final formula that will help measure both credit and operational risks. The complexity of the new Accord is just a reflection of the advancement of the banking industry ," says Wissam Khoury.

The Reuters Solutions expert will emphasise the importance of having the banks starting to collect data that will help them measure risks and comply with Basel II when the time comes.

Central banks, banks and financial institutions throughout the world are currently in consultation with the Basel II Committee to help refine the existing draft. Regulatory bodies such as the Central Bank of the UAE, Bahrain Monetary Agency and Saudi Arabia Monetary Agency, have requested all banks to comment on Basel II draft. The third release of the Consultancy Paper (CP3) is expected to be issued in June.

Wissam Khoury emphasises the importance of the Basel Accords in setting market standards and providing emerging markets with more protection and lower risks. He said that Reuters offers total solutions that help banks manage their risks, including Risk Management and Straight Through Processing (STP) Solutions. STP helps banks reduce risks caused by human error while Risk Management solutions help banks manage their various financial activities.

"Considerable efforts will be needed in the coming few years by banks and regulatory bodies to acquire the necessary skills to implement the new Accord," explains Wissam. In addition to market and credit risks, banks need to measure operational risks, which include human error or any third party event that may pose potential risks on the business. A case in point is the September 11 incident, which caused major disturbance in international markets and led to bankruptcies and financial difficulties.

ENDS

Issued on behalf of REUTERS by Gulf Hill & Knowlton. For further information please contact Randa Mazzawi on 9713344930

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