Local lenders playing catch-up

Chinese banks are gradually remodelling their risk management systems to meet the requirements of Basel II, the global accord on banking capital standards, but they are still in the early stages of its implementation, according to the Ernst & Young's first Asia-focused survey on the region's banks' Basel II preparedness, which was released yesterday.

Eight local banks participating in the survey showed that Chinese banks' awareness of and preparation for Basel II has increased significantly over the past two years, although a great amount of work awaits them in the next few years.

"I did not find any surprises in the survey's result, which actually confirmed our understanding of China's banking industry," Phillip Straley, partner with Ernst & Young's Financial Services Risk Management practice, told reporters yesterday. His team spearheaded the survey.

The Basel II capital accord, issued by the Basel Committee on Banking Supervision, determines what capital levels should be deemed safe for commercial banks. Finalized last June, the accord replaced the 1988-issued Basel I capital accord, and it is expected to provide new impetus for banks to strengthen risk management.

As China's banking industry is still in transition to become a market-oriented sector, China's banking regulators have decided to postpone the compliance date of the Basel II requirements.

According to Straley, most Chinese banks find data collection a big hurdle when implementing Basel II. As the global bank accord requires banks to collect data from the previous three or four years, Chinese banks are finding it tough as they were unaware of this regulation or they did not have the systems in place at the time to make this possible.

Straley said this was not unique to China, as he has found similar cases in other Asian markets. "Some State-owned banks are so big and their sprawling branch network can add to difficulties in collecting data," he said.

While Basel II will not be implemented for regulatory capital purposes in the international time frame, the China Banking Regulatory Commission has made it clear that Basel II internal-rating-based implementation will be important in the near-term for at least China's large State-owned banks, Ernst & Young partners said.

According to Alfred Yeung, partner in Ernst & Young's global financial services, "banks in China - both State-owned and others - will need to prioritize in a practical way the aspects of Basel II implementation that will have the greatest impact on their business and competitiveness."

As a rule, Straley said significant gaps remain in preparedness between the large Western banks and all but a few Asia-Pacific-based banks, though many of the institutions in the region are striving to lessen the divide.

According to the survey, significant progress has been made by Asian banks in technology support infrastructure and, in some cases, development is already underway to handle the consolidation of risk-weighted assets, disclosure and reporting.

Despite the progress, however, the survey found that 65 per cent of institutions in the region are still in the early stages of their Basel II implementation or have not started yet. According to Straley, progress "has been substantial for only the top institutions in the region, and we expect at least second-tier banks to be catching up fast during 2005. Smaller banks as a group will continue to lag behind and will need to understand and manage the consequences."

The survey was conducted jointly with the Asia Risk magazine from mid-November to early December last year. The types of institutions and profiles of respondents are principally commercial banks and the bank's risk management executives in the Asia-Pacific region.

Source: China Daily