Is Basel II really just another regulatory issue?

Basel II's main objective is to align regulatory capital measures with the inherent risk profile of a bank considering credit, markets and operational risks.

Basel II comprises a 3 pillars concept:

Pillar 1  Minimum standards for management of capital.

Pillar 2  Supervisory review processes and risk factors.

Pillar 3  Market discipline addressing the transparency of financial disclosures.

What has been observed as the focal point of Basel II in all three pillars is the fundamental requirement for effective risk pro¬file management. For Thailand, the fact that banks are expected to achieve "accreditation" level by 2009 leaves many banks try¬ing to find out what elements are required for compliance with Basel II?

Additionally how do banks go about the implementation of guidelines and frameworks? What should banks take into account to change their current practices to conform to Basel II?

Before proceeding to the imple¬mentation stage, banks need to deal with the unavoidable steps of (1) translating regulatory requirements into practical implementation, (2) identifying what is needed by banks' sub¬sidiaries and branches and (3) identify effective ways of how to achieve the Basel II objec¬tives.

These steps are the most crucial part of the initial stages and could make a big dif¬ference to the bank in terms of both time and cost.

Presently, banks are facing sig¬nificant pressures due to the reg¬ulatory timeframe and other major challenges such as data comprehensiveness and accura¬cy, system implementation and integration with other source sys¬tems.

Banks needs to review their operational pro¬cedures, data quality and integrity, and the risk manage¬ment process and risk informa¬tion systems in order to gear up for Basel II implementation.

One might ask why we not just simply only do what the regulator requires and forget about getting involved with the wider picture of risk organisa¬tion? The answer is that banks should approach Basel II from the strategic point of view of managing business uncertainty rather than just satisfying regula¬tory pressures so that they can better create and protect share¬holder value.

Basel II primarily focuses on credit, market, and operational risks which are taken into account in reviewing the appro¬priate level of capital adequacy; therefore these risks need to be clearly quantifiable.

Therefore, comprehensive and relevant data collection is no longer optional. Banks are required to define and establish data management processes, monitoring tools and controls to ensure data quality and integrity.

Doing business is fundamental¬ly a risktaking exercise. Risk management is the proper han¬dling of activities to ensure that they are conducted within con¬trollable and acceptable proce¬dures that will keep possible losses at an expected and tolera¬ble range.

Managing business uncertain¬ties and embedded risk culture is a key management responsibility. Examples of such responsibilities include setting policies and mon¬itoring risktaking activities.

In developing effective risk management, there are a number of key steps to follow; risk identi¬fication, risk measurement, risk evaluation and control, risk/return analysis, riskbased capital allocation, and riskbased pricing and remuneration.

Management has to determine the direction of the organisation by setting goals, vision and values.

Suttharug Panya is partner of Deloitte Touche Tohmatsu Jaiyos ,  Financial Services Industry (FSI).