Though firms need to start laying down Basel II groundwork in 2003, many questions still need to be answered.
Basel II recommendations are expected to be finalized this year, but there is much work to be done as firms move to the implementation phase. The main objective of Basel II, released by The Bank for International Settlements (BIS), is for firms to gain an enterprise-wide view and measurement of risk, with incentives to adopt sophisticated risk-measurement techniques in exchange for lower capital requirements.
As firms begin implementing technology in preparation for the new recommendations, they should be concentrating on the collection of data necessary to fuel the risk models. To accomplish this, firms are going to have to invest in data architecture, says Deborah Williams, research director at Meridien Research.
"The BIS isn't very specific about what the technology would be to make this happen, but we do know that most institutions will have to bulk up, at least somewhat, on the back end to get that data infrastructure in place," she adds.
In addition to risk-data collection and models, operational risk, the newest area of risk to be addressed by the accord, is also a growing concern.
Joe Sabatini, managing director and head of corporate operational risk at JPMorgan Chase, says that operational-risk efforts are in a transition phase, moving from design and framework to the actual implementation of operational-risk strategy.
"The regulators have come out with a series of working papers for guidance, but they're still at a high level," says Sabatini, adding that the actual implementation of these guidelines is not as clear-cut. "For example, you're required to use external-loss data, but what does that mean? Do I have to populate my database with external losses or does it mean I have to be mindful of the losses of others and consider them?"
He says that this "implementation issue" is one of several issues that are still being worked out by regulators and will continue to be the focus as the industry moves into 2003.
Another issue that needs to be worked out in the coming year is the "home/host regulatory approach," says Sabatini.
In a global financial-services industry, firms have subsidiaries and branches around the world, but how will those offices be regulated?
"There are still a lot of small items that need to be resolved, whether they're solely regulatory issues or an advancements of our own thinking and good risk-management principles," he adds.
PWC's Basel II Strategy
PricewaterhouseCoopers has developed a strategy to help firms identify gaps in credit and operational-risk processes and determine a suitable Basel II compliance approach.
Step 1 - Diagnostic:
-Identify major gaps and problem areas.
-Assess the regulatory-capital impact of proposals across the firm or within specific business units.
Step 2 - Implementation:
-Define a development strategy to focus on attaining the strategic and operational business benefits, over and above the requirements to ensure compliance.
-Establish a Basel II development program, clearly defining milestones and responsibilities, lobbying activities and dedicated resources.