Proposed reforms to the Basel Accord are expected to have a significant impact on banks in Asia-Pacific, according to a recent joint KPMG and Oracle survey of executives from financial institutions across the region.
Seventy-six percent of respondents said regulatory reforms would affect their business. Over half said they expect their banks' business models would need to change to address regulatory reforms and 48 percent expect their banks would need to raise additional capital.
Areas of concern include high compliance costs, reduction in the banks' competitiveness and higher cost of capital, which may become more difficult to access.
"If there is an underlying theme from these regulatory reforms, it is that the new regulations will hit banks' top and bottom lines, and more costs will be transferred to customers," said Dr. John Lee, KPMG Asia Pacific leader for financial risk management.
Meanwhile, 72.5 percent said they are of the view that new regulations such as Basel III should be applied to financial institutions in the Asia-Pacific region. However, only one-third of respondents thought the reforms would create a "level playing field" of global banks relative to Asian banks, since the latter are relatively more capitalised.
The top three important areas of regulation that are of priority to respondents are capital management, including the Internal Capital Adequacy Assessment Process (ICAAP), liquidity risk management and enterprise wide stress testing, across risk categories.
Most respondents thought their banks would require additional risk management infrastructure. Over 96 percent said they considered that an integrated approach to risk, performance, compliance and capital was either critical or important/very important to "Future Proof" themselves. In terms of challenges, 88 percent of respondents highlighted data related issues while 75 percent pointed to not having the right IT systems infrastructure in place.
"A 'pooling of tools' approach falls short in delivering the flexibility and integrated enterprise view that banks need to meet emerging regulatory requirements," said Ms. Saloni Ramakrishna, Principal Architect (Risk & Compliance solutions) Oracle Financial Services, Asia Pacific & Japan. "We see data and data architecture mastery, an integrated and flexible technology infrastructure, interactive and transparent reporting, and functional risk, compliance and performance solutions as essential requirements for not only managing, but thriving, in the 'new normal'."
Banks were also asked to consider what key operating areas would be affected as a result of reforms.78 percent cited lending and risk pricing, 59 percent indicated performance management systems; 57 percent said trading counterparty transactions while 35 percent highlighted executive compensation.
Respondents indicated a number of constraints when implementing new regulatory obligations. These include lack of internal expertise and availability, complexity and lack of clarity, information technology capabilities, data availability and reliability.
The regulatory changes are also affecting governance structures and practices. More than 70 percent said they have had to refine the terms of references of their risk management committees, while 46 percent indicated that the board needed a more integrated view of risk management. Meanwhile, 35 percent said they had appointed a steering committee to oversee the introduction of the new regulatory requirements.
In terms of the overall impact, 40 percent thought it would improve the economic environment, while 20 percent said they feared reforms would have an adverse affect.
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About the Survey
In September 2010, KPMG and Oracle conducted a survey of financial institutions across Asia Pacific & Japan, to seek their views on the potential impact of regulatory reforms on their business activities.
The survey was targeted at c-level executives at banks. Over 40 percent of the respondents were Chief Risk Officers (CRO), while around 80 percent were broadly based in the retail and corporate banking sector. Investment banking and Islamic banking entities are also represented in the survey. Most possess assets exceeding USD 10 billion.
KPMG is a global network of professional firms providing Audit, Tax and Advisory services. We operate in 146 countries and have 140,000 people working in member firms around the world. The independent member firms of the KPMG network are affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. Each KPMG firm is a legally distinct and separate entity and describes itself as such.
KPMG China has 13 offices (including KPMG Advisory (China) Limited) in Beijing, Shenyang, Qingdao, Shanghai, Nanjing, Chengdu, Hangzhou, Guangzhou, Fuzhou, Shenzhen, Xiamen, Hong Kong and Macau, with more than 9,000 professionals.
Oracle (NASDAQ: ORCL) is the world's most complete, open, and integrated business software and hardware systems company. For more information about Oracle, visit www.oracle.com.