For those banks that had adopted the sit and wait posture, the wait is over in the form of a UAE Central Bank notice for banks to begin work on Basel II implementation. We take a look.
The Central Bank notice expects the banks to be complaint with at least standardised approach for credit risk by the end of next year and internal rating based or IRB complaint for the same by the beginning of 2011. Although there are banks that have already done quite a lot of work in this regard, there are those that need to now really work hard to meet the deadline. This also means hiring risk management experts, who are may be expensive and not easy to find, placing even more emphasis on training of own staff.
Based on the extensive events organised by the Central Bank over the past two years, there is clear indication that it is keen to work very closely with the country's banks. In fact, it intends to put together a number of joint working groups to hold meetings and discussion, to arrive at recommendations based on the input from all participants.
As a publication we have had the opportunity of speaking to a number of banks on their preparedness for Basel II implementation, and while everybody agrees that it will have a positive impact on the stability of the financial system's stability, risk management systems and corporate governance, a few do admit that the whole process calls for a lot of work.
For Islamic banks, they say that while they will be 90 per cent ready to meet the deadline, there is a need for the Central Bank to come up with specific guidelines on managing risks specific to Islamic banking as well.
In all probability, there is work to be done in this regard; but one also understands that this could take time to develop as Islamic institutions work as an industry to sort out issues at the macro or industry level on risk management.
One of the most important things for the industry, going forward, will be to look at what a handful of banks have done locally to achieve certain milestones towards Basel II implementation. Rakbank is one such bank that claims to be compliant with respect to the standardised approach for credit risk and market risk and the alternative standardised approach for operational risk in order to determine risk weighted assets.
Says Graham Honeybill, general manager Rakbank, banks that start now will have to invest in technology and in procuring expertise in the form of human resources, to ensure that the December 2007 deadline is met.
"Unlike Basel I where the onus of reporting was mainly on the finance department, Basel II involves a lot of interaction and co-ordination between finance, risk, credit and the business heads. Unless there is strong support from the board of directors and the chief executive of the institutions, adhering to the deadline will be difficult," he notes.
Honeybill says that the most important lesson they have learnt as a bank while working on the credit risk module is that it is not sufficient to only collate data, but also come up with the right procedures of reconciliation between the financial and risk systems. But, now having achieved what they were supposed to meet at the end 2007, Rakbank has already begun working on IRB approach.
"The IRB approach has to be taken one step at a time. We intend to do the foundation IRB approach first and then only move towards the advanced approach. We are in the process of implementing a new retail loan system that will be operational in February 2007. The data from this system will be used for determining risk weighted assets," explains Honeybill.
Mashreqbank is another important player in the industry when it comes to risk management and they have worked quite effectively in developing their internal risk based approach.
Ambi Venkateswaran, senior vice president and head of risk of Mashreqbank, discloses that his bank has been following the internal risk based approach for credit risk, as risk has to be carefully managed. According to him, banks should prepare for internal rating based measurements as one cannot manage something unless one measures it accurately.
He, however, also cautions the country's banks to be careful of consultants selling them systems and technology that may not be appropriate for them.
"There is always the danger of buying solutions that are over engineered and not suitable for your bank," he says.
Venkateswaran's argument is understandable, and that is why it is more important than ever for banks in the country now to develop the acumen internally that will help them judge what is right and wrong for them and approach the right solution provider, if they have to outsource or purchase systems.
© UAE MONEYworks 2006
