Ernst & Young's 2006 Global Basel Survey points out that senior banking executive are beginning to realize the long-standing business impacts of Basel II on banking and industrial organizations. The key factors that make Basel II a favourite amongst the banking executives are its vibrant portfolio management, greater use of hedging and derivatives, and an amplified use of risk-based pricing. 89% of senior executives deem that banks with a vigorous risk infrastructure will have an aggressive edge over the rest.
Throughout the world, the financial services organization are identifying and accepting a new era of banking, brought about by Basel II. This report is based on a survey published by the foremost professional services provider Ernst & Young. More than three quarters of surveyed banks deem that the policies will modify the competitive scenario for banking. Organizations with enhanced risk systems will profit at the cost of those who are less flexible to change. Over 70% of respondents believe that with the aid of Basel II, the portfolio risk management will become more active with more accurate, with timely risk information and accessibility to differential capital requirements.
Even though the gradual implementation of Basel II is unlikely to bring radical change due to unfinished business and continued regulatory uncertainty, but it will surely bring a substantial change to the to the business of banking. According to the report, the anticipated benefits are extremely effective. Implementation of Basel II will provide more active portfolio management and forward-looking risk assessment. It includes more active loan sales by 43% more and 40% greater use of hedging and derivatives. Basel II will have a wide-ranging consequence on pricing and products. With the boost in the spreading of Basel II impacts, the pricing of risk will become ever more proactive. Basel II will also have an impact on performance management. Due to its ability to compute risk-adjusted capital, 55% of banks prepare to use it for performance management and 65% for capital attribution. More than 50% of banks plan to make use of economic capital in dropping incentives for business units.
The report suggests that the full impact of Basel II will take a couple of years to materialize. But it is surely going to bring about a change in the competitive scenario. It will provide a better alignment between the risk and the finance functions. Also, Basel II is expected to provide greater spotlight on core business, recoil of minor firms into niche markets, and authority by large organizations with well-developed infrastructures. Even though much remains to be done, but the Big Four firms shows yet again that they are never short of innovative ideas to bring about a radical change in the industrial world.
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