Basel II will be the focus of IT investments for Western European Banks in 2006 and 2007

Financial Insights has just published a study on Basel II contrasting the European approach with that taken in the United States and other regions. The European approach is adding to the overall compliance workload and leading to regulatory fatigue. Financial Insights believes that the real return on Basel II IT investment will depend to a great extent on whether financial institutions have wider objectives for their risk management framework or are merely aiming at narrow technical compliance.

The study explores how:

* Basel II will have a wide-ranging impact on bank technology spending. Besides specific tools for credit and operational risk management, Basel II will also entail IT enhancements to legacy core banking and customer relationship management (CRM) systems.

* The cumulative workload of ever increasing regulatory compliance is forcing banks to take a strategic view of their data storage architectures and even causing some banks to review their core systems. Ad hoc solutions for each project are no longer adequate. It will be important for banks to tackle the common elements of regulatory compliance coherently and take an enterprise view.

* The real impact will be on changes to products and services to take advantage of the new economics created by the new capital allocation processes required. This cultural impact is equally important and will require new ways of thinking.

Financial Insights estimates that Western European banks will concentrate their IT investments for Basel II in 2006 and 2007, while investments to date were mainly dedicated to planning. In particular, Basel II related IT spending is expected to reach about 5.5 percent of the total IT spending of banks in 2007, strongly contributing to the growth of IT spending over the following years.

This Financial Insights study, ‘Basel II: It All Depends on Where You Want to Get To’, by Simona Macellari (Financial-Insights #FIN1565, January 2005) examines the impact of Basel II framework in Europe, the compliance readiness of institutions and their related IT spending for 2003-2008.

•Date: 8th February 2005 • Region: W.Europe/UK •Type: Article •Topic: Operational risk
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