The implementation of Basel II has brought significant change to the banking industry, and the services offered by this sector. Are we getting our money's worth when it comes to risk assessment and management? Many banking executives are beginning to appreciate the impact of Basell II, and believe that key benefits will include more dynamic portfolio management, greater use of hedging and derivatives, and an increased use of risk-based pricing.
Among the many changes, the unfinished business and the regulatory uncertainty in many areas, the banking industry is beginning to realize the tremendous impact that the new regulations are likely to have on the banking industry, especially as implementations get under way.
The effects will be seen in three principal areas:
1. More active portfolio management and forward-looking risk assessment: Thanks to the use of more interactive technology and risk assessment programs, the banking industry will become more active in portfolio management strategies, the use of hedging and derivatives, and increased use of risk transfer instruments. The access to timelier and higher-quality risk information has and will continue to have a direct impact on this area.
2. Pricing and product offerings: As the Basell II and Pillar I, II, and III continue to impact the industry, pricing policies and product offerings will continue to experience tremendous change, globally. The global framework and expansion opportunities that the emerging economies offer the banking industry dictate that the area of pricing and product will see tremendous change, both in range and risk.
3. Performance management: This area has already begun to see change and results in the way that the banking industry has interpreted the use of capital in relation to risk assessment and adjustment. Many in the banking industry intend to use economic capital in deciding incentives for business units.
Organizations with well-developed risk infrastructures will gain the competitive advantage as well as a better alignment between the risk and finance functions. This opportunity results in a more comprehensive risk management program, and a better understanding of risk within the organization. This interprets to positioning the organization as an enabler of change, global change.
