Banks Slow in Making Progress toward Basel II Compliance, Accenture Survey Finds; Cost Expectations and Concerns about Payback Rise; North American Banks Still Lag European Counterparts

The survey queried senior executives responsible for Basel IIcompliance at 63 of the largest banks in North America and Europe togauge the response to the challenges posed by the Framework, whichstrengthens existing capital rules by making them more risk-focusedand by aligning regulatory capital levels more closely with economiccapital to better reflect market risks.

Findings indicate that most banks are finding implementationtougher than anticipated and are less certain about the benefits ofcompliance than last year, when Accenture conducted a similar survey.Nevertheless, the vast majority of respondents said that theregulation is a catalyst for moving toward a more risk-based culture-- a key objective of the Framework -- by focusing senior managementmore closely on risk practices and on securing funding for necessarytechnology.

Consistent with findings from last year's survey, European banksare still much further along the Basel II implementation cycle thanthose in North America, perhaps reflecting a degree of complacency inlight of last year's decision by U.S. regulators to delay applicationof the Framework domestically. The Basel II rules are expected to takeeffect globally in January 2008, although in the United States onlythe largest internationally active banks are required to comply.

"We were expecting more progress than we found over the last 12months," said Paul Cartwright, managing partner of the Finance &Performance Management practice in Accenture's Financial Servicesoperating group. "On the other hand, we're seeing a greater focus onmoving forward on compliance, especially in North America. That'sgood, because the survey indicates that complying with Basel II ismore difficult than most bankers thought."

Major survey findings include:

-- Almost half (45 percent) of the executives interviewed said they expect to spend in excess of EUR 50 million through 2007 on Basel II compliance, up significantly from 23 percent in last year's survey. Banks now have a much better idea of their total cost of compliance than they did last year, with only 10 percent of survey respondents saying they remain unsure of the total cost, compared with 29 percent last year.

-- Going beyond simple compliance, half (49 percent) of surveyed banks reported plans to leverage their Basel II capabilities with moderate or considerable further spending in more strategic solutions such as embedding best practices across their risk functions.

-- Seventy-nine percent of respondents said they expect Basel II to improve their banks' capital positions only slightly or not at all, an increase from 73 percent in last year's survey.

-- Reflecting the goal of the new rules to increase bankers' focus on managing capital for business rather than regulatory needs, about half (48 percent) of respondents said that the Basel II implementation process has improved their enterprise-level economic capital framework. Asked for examples of Framework benefits, the greatest number of respondents -- 83 percent -- cited two areas equally, improved capital allocation and closer alignment of the risk and finance functions.

"We were surprised to see such high expectations for integrationof risk and finance, given their traditional separation," Cartwrightsaid. "This should improve the quality of the data that supportdecision-making, particularly through a more risk-sensitive approachto profitability analysis and capital management."

Long Road Ahead

Survey results also indicate that while preparations for Basel IIimplementation proceed, many banks have significant work remaining.Only three (5 percent) of this year's respondents said theirorganizations have implemented at least one component of their BaselII programs. Across all geographies, the majority of banks are stilldesigning or building their Basel II solutions. Even a reduction inrespondent North American banks reporting early-stage gap analyses ordesigning solutions from 71 percent last year still shows half of 2005surveyed institutions at this level.

In addition, only about two-fifths (39 percent) of North Americanbanks have reached the 'build and test' phase of Basel II compliance-- considered the benchmark of concrete progress towards implementinga solution -- up from 21 percent last year. This compares with 82percent of European banks attaining this stage this year, up from 67percent last year.

The survey also shows that for many European banks, expectedlevels of spending on Basel II compliance are migrating higher. Forinstance, when asked their program estimates, 33 percent of Europeanrespondents in this year's survey said they expected to spend betweenEUR 51 million and EUR 100 million, up significantly from only 16percent last year. Conversely, surveyed banks expecting program costsof EUR 26 million to EUR 50 million declined from 22 percent last yearto only 9 percent this year.

Lagging North American banks appear to not yet comprehend the fullimpact of Basel II on their organizations, as 39 percent reported theyexpect to spend no more than EUR 25 million on their complianceprograms.

"As European banks advanced further in the Basel II implementationcycle, they reported substantial increases in expected costs,"Cartwright said. "North American banks are earlier in the cycle andare probably underestimating compliance expense. Although many largeNorth American banks already have the sophisticated risk measurementcapabilities encapsulated in Basel II, most still face significantspending to get the underlying data right and to address the crucialPillar 2 reporting requirements."

Across both regions, for most banks the bulk of Basel II spendingwill be on credit risk and information technology systems, withoperational risk requiring a far lower portion of the expense.

Benefits Less Clear

Bankers are generally less enthusiastic about the benefits frominvesting in Basel II compliance than they were last year, withnotable regional differences. When asked how they viewed investing forbusiness benefits beyond basic Basel II compliance, 60 percent ofEuropean participants said the business case was "strong" or "verystrong," compared with just 34 percent of North American respondents.

Across all geographies, there was a sharp decline in the positiveperceptions of specific benefits from implementing Basel II. Forexample, only 35 percent of respondents in this year's survey saidthey strongly agree that the Framework will improve capitalallocation, down from 55 percent last year. In addition, only 19percent of respondents in this year's survey said they strongly expectenhanced market perception to result from compliance, down from 59percent last year; and only 25 percent this year said they stronglyexpect enhanced process efficiency, down from 43 percent last year.

"Banks' experience with Basel II continues to lower the industry'sexpectations about what compliance will actually achieve and at whatprice," said Cartwright. "Unfortunately, these cost concerns areovershadowing the positive long-term business case for many banks.Some are focused solely on cost, while others are looking at the majorbenefits and competitive advantage that modest additional investmentcan bring."

Methodology

The survey was designed and analyzed by Accenture and executed viatelephone interviews with senior executives at 63 of the largest banksin North America and Europe during April and May 2005. The interviews,conducted by market research agency Kadence (UK) Ltd on behalf ofAccenture, were based on a standardized, structured questionnairedesigned to explore respondents' views on key issues in relation totheir implementation of the Basel II Framework.

About Accenture

Accenture is a global management consulting, technology servicesand outsourcing company. Committed to delivering innovation, Accenturecollaborates with its clients to help them become high-performancebusinesses and governments. With deep industry and business processexpertise, broad global resources and a proven track record, Accenturecan mobilize the right people, skills and technologies to help clientsimprove their performance. With more than 115,000 people in 48countries, the company generated net revenues of US$13.67 billion forthe fiscal year ended Aug. 31, 2004. Its home page iswww.accenture.com.