Banks doubt Basel II's business benefits

Banks are failing to prepare for the latest regulations because they are unsure of the business benefits, new research has found.

An Accenture survey of compliance chiefs in 63 US and European banks found the majority were struggling to implement the IT systems necessary to comply with Basel II, a regulation aimed at making financial companies focus on business risk.

Many have significant IT work remaining; only three respondents (five per cent) said they had implemented at least one component of their Basel II programs.

Thirty-nine per cent of north American banks have reached the 'build and test' phase of Basel II systems, up from 21 per cent last year. This compares with 82 per cent of European banks reaching this stage, up from 67 per cent.

Expected levels of spending on Basel II are spiralling, with budgets higher in Europe than across the pond. Thirty-three per cent of European compliance chiefs said they expected to spend between €51m and €100m on compliance programs, while 39 per cent of US banks said they expect to spend no more than €25 million.

Paul Cartwright, managing partner of Accenture's Financial Services, said: "As European banks advanced further in the Basel II implementation cycle, they reported substantial increases in expected costs. North American banks are earlier in the cycle and are probably underestimating compliance expense. Although many large north American banks already have the sophisticated risk measurement capabilities encapsulated in Basel II, most still face significant spending to get the underlying data right and to address the crucial reporting requirements."

The banks surveyed were less enthusiastic about the business benefits of Basel II than last year - only 35 per cent said they agreed the regulation would improve capital allocation, compared to 55 per cent in 2004. Nineteen per cent of respondents said they expected to see better market perception to result from compliance (59 per cent last year), and only 25 per cent said they strongly expected enhanced process efficiency (43 per cent last year).

Cartwright said: "Unfortunately, these cost concerns are overshadowing the positive long-term business case for many banks. Some are focused solely on cost, while others are looking at the major benefits and competitive advantage that modest additional investment can bring."