Effective Risk Management Can Lead to Greater Profitability, According to Report from Asian Banker Research and SAP
Singapore — By improving economic capital management and risk governance control in their respective Basel II initiatives, banks can also enjoy greater profitability according to an Asian Banker Risk Management Special Report. The report was commissioned by SAP, the world’s leading provider of business software solutions.
The Basel II accord has now gained general acceptance across the region, and banks in Asia Pacific have started to put into place the necessary measures based on their most feasible pace of implementation, suitable to their unique legal, regulatory, and competitive landscape.
“Risk management may in fact be a proposition for profitability.” Said Mark Lee, Research Manager, The Asian Banker Research, “Most banks in Asia hold unnecessarily high levels of capital adequacy ratio. Better risk management allows banks to be more efficient in allocating and using capital.”
This presents a different scenario compared to the period after the Asian financial crisis in 1997 and ratification of Basel II, when most Asian banks were perceived to have hesitated in investing in solid risk management strategies.
The Asian Banker Risk Management Special Report also found that technology sophistication—in terms of core banking systems, data warehouses, and query and retrieval capabilities—is key to making progress with risk management projects. Banks with a head start in proper data capture, information and reporting systems are leading in risk management implementation.
While good data is important, what is more critical is how the data is actually used. “Accurate data on defaults and losses by products and business segment is the first step, without this anything else is a waste of time,” said Mark Lawrence, chief risk officer at ANZ.
“The real issue for banks is to develop an integrated risk platform that supports regulatory requirements as well as internal control functions. For instance, the integration of finance-oriented and risk-oriented application in one technology framework, will enable banks to manage their portfolio on real risk and return basis,” said PR Balaji, Director, Financial Services, SAP Asia Pacific.
Mr. Balaji added, “The challenge for IT is to provide risk-relevant information of past damages over a preferably long time period with consistent quality. Delays in compiling these figures have a direct effect on their meaningfulness and therefore on the quality of the credit risk evaluation. On our end, we believe that SAP solutions can liberate banks from unnecessary complexity and high IT maintenance costs.”
The Asian Banker Risk Management Special report also showed that credit risk management could have the highest impact on a bank’s capital management to achieve Basel II compliance. Currently, credit risk management represents about two-thirds of all the resources deployed to investments to building risk management. Capital savings is a strong incentive for banks to implement solid credit risk approaches.
Over 50 percent of the banks surveyed indicated that they adopted an “enterprise-wide approach” to risk management. Banks in Korea and Australia are involving risk management practices in investment projects and calculating levels of risk exposures. Their success is dependent on the ability to meet and address organizational and operational challenges.
The study suggested that Basel II compliance would benefit Singaporean and Hong
Kong banks more than European or American banks, as they have higher levels
of capital adequacy ratios compared to foreign banks. Banks in Singapore and
Hong Kong have been conservative, holding capital in excess and relatively lower
loan-to-deposit ratios. Better risk management allows banks to be more efficient
in allocating and using capital.
The Monetary Authority of Singapore (MAS) re-adjusted the minimum Tier One
ratio to 10 percent, down from 12 percent, in an attempt to enable domestic
lenders to compete with foreign players. However, local banks are still holding
excess Capital Adequacy Ratios of 3.6 percent to 7.7 percent above levels required
Many of the Malaysian banks interviewed for the study have only started to implement
a risk management roadmap and timeframe, and performing gap analysis. However,
they expressed a sense of urgency and viewed compliance with Basel II as a deeply
rooted process in Malaysia.
The Central Bank has adopted a two-phase approach towards Basel II, selecting
their most feasible pace of implementation suitable to their unique legal, regulatory
and competitive landscape. Bank Negara set a deadline of January 2008 for local
banks to adopt the standardized approach for credit risk and the basic indicator
approach for operational risk. For more aggressive banks, the foundation internal
ratings approach is set to begin in January 2010.
Banks in Hong Kong have been conservative, holding capital in excess and relatively
lower loan-to-deposit ratios. Many of these family-run banks tend to fund loan
growth through cheaper access to deposits rather than through borrowing.
Also, banks in Hong Kong have invested heavily in IT infrastructure for compliance
purposes. In terms of core banking systems and data warehousing, these banks
have invested three times more than banks in Malaysia, Singapore or Indonesia.
The study indicated that Australian banks led their Asia Pacific counterparts
in terms of preparedness for Basel II. The level of implementation and advancements
of risk management processes in Australian banks were more in line with those
of European banks than their Asian counterparts. In terms of data management,
the four Australian banks were in the lead with more than 10 years of disciplined
approach to credit data collection and measurement.
Findings from the study showed that board members in the Korean banks were more
open to taking risks including management approaches, and were committed to
investing in relevant technology projects.
The level of management commitment to risk is illustrated in the strong support
given to the heads of risk management. Interviews with the chief risk officers
at Kookmin and Shinhan banks proved this endorsement. The chief risk officers
at Korean banks demonstrated an ability to not only gain the mind share of board
members, but also obtain their commitment for investment in relevant Basel II
SAP commissioned the Asian Banker Risk Management Special Report to better
understand the critical success factors, among banks in Asia Pacific, for effective
management, risk mitigation and corporate governance. In addressing the concerns
of Basel II, SAP has incorporated new functionality in its banking solutions
to help banks get ahead. SAP for Banking helps banks meet the requirements for
calculation of risk exposure and capital, supports the supervisory review and
disclosure process and provides a historical database to calculate and validate
credit risk parameters.
This special report is the result of an annual survey by Asian Banker Research on risk management in banks in the region. The detailed survey this year was limited to 20 banks from a sample size of 300, as being the only banks that have developed any meaningful implementation projects that can be tracked and verified as leading to Basel II compliance. From the 20 selected banks, interviews were performed with the respective risk management bankers for in-depth analysis of their approach.
About Asia Banker Research
The Asian Banker research is an integrated intelligence company that is the region’s most authoritative provider of strategic business intelligence for the financial services community. Its research arm, Asian Banker Research, combines proprietary, subscription and generic research services to track global best practices and establish benchmarks for the financial services community. The company also publishes The Asian Banker Journal.
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