WASHINGTON - Four out of five U.S. banks have at least begun preparations for compliance with the capital rules being revised by the Basel Committee on Banking Supervision, a recent survey by KPMG International has found.
The accounting firm polled 190 banks in 19 countries this fall and found that 80% of the U.S. banks have begun preparing not only for changes to the Basel accord's credit risk element, but also for the more controversial proposal to establish an "operational risk" component. The planned changes would take effect in 2007.
The results of the survey, to be published today, may surprise some observers. In recent years U.S. banking regulators have repeatedly criticized the industry for its failure to focus on the impending changes to the way banks would manage risk. "We have found that even our largest and best-managed banks have some distance to cover to meet the proposed Basel standards," Comptroller of the Currency John D. Hawke Jr., said in June.
Steven M. Roberts, the partner-in-charge of KPMG's national regulatory advisory services practice here, said he was "surprised that there were so many banks in the survey that said, 'We are moving ahead full steam.' "
The pending changes to the Basel accord, which has set international capital requirements for banks since the late 1980s, are meant to reduce the system's exposure to exploitation, update the rules to reflect contemporary risk management practices, and mandate capital for risks that were not considered in the first version.
The revised accord would allow banks to choose from among several methods for determining how much capital they should hold for credit risk. Institutions found to have sophisticated risk management and measurement systems in place would be allowed to hold less capital for credit risk.
The survey found that 60% of U.S. banks intend to attempt to qualify for the most advanced approach, which would give them the most control.
On the question of operational risk, which the Basel Committee defines as "direct or indirect loss resulting from inadequate or failed internal processes, people, and systems, or from external events," banks would also select from a variety of methods with different levels of sophistication.
Again, most U.S. banks said they want to use the most advanced method Basel would offer; 80% say that they intend to conduct their risk measurements internally.
Operational risk was also the biggest source of anxiety among those preparing their institutions for Basel compliance, the survey found. Nearly 70% of the respondents said that the new accord's operational risk component was causing at least "significant" concern, and more than 50% labeled their level of concern as "high," "very high," or "extremely high."
The primary source of concern was the Basel Committee's insistence that banks have several years worth of data cataloguing operational risk-related losses.
"Most companies are going to be collecting data and refining it" right up until the new accord's effective date, Mr. Roberts said.
More than 80% of the worldwide respondents said that they expected at least a "significant" reduction in capital. More than 40% characterized their expected reductions as "extremely high."
"I was a little surprised at how optimistic the U.S. banks were … that they could reduce their capital requirement," Mr. Roberts said. That belief is "probably well-founded among the larger banks," but it is less clear how the new accord would affect regional or smaller banks.
