Basel II: Banks Must Generate Quality Data, Manage “Change”

ALTHOUGH guidelines for adoption of Basel II are yet to be released in Nigeria, banks may face critical implementation challenges in the areas of data and “change” management, Dhananjoy Misra, Senior Risk Advisor at the H. Pierson Associates Ltd, said at the weekend.

Misra made this observation in Lagos during the Inaugural Breakfast Session on Basel II, organised by the company on Friday.

Basel II is the second of the Basel Accords — now extended and effectively superseded by Basel III —, which are recommendations on banking laws and regulations issued by the Basel Committee on Banking Supervision.

The fact that a German bank entered into bankruptcy in 1988 after failing to meet its obligations with other banks, had prompted the setting up of a committee to, among other requirements, address the issue of capital adequacy for unexpected credit losses, asset classification (tier one and two), recognition of income, as well as classification of capital.

Capital adequacy for market or trading portfolios and tier 3 capital for market risk, and other standardisations, were, in the same vein, created in1996 under Basel 1.5 (with major revisions effected in 2005 and 2011 to address specific concerns in the derivatives market).

Basel II, which was intended to create an international standard for regulators to control how much capital banks need to put aside to guard against the types of financial and operational risks faced by them and the economy, was initially published in June 2004. Its preoccupation was to remove competitive inequality among internationally active banks by maintaining sufficient consistency in regulation.

Prior to the regulatory environment of 2008, it was politically difficult to implement Basel II, as progress remained generally slow; but the financial and economic crisis that was caused by credit default swaps, mortgage-backed security markets and similar derivatives, triggered a new form of negotiation resulting in much more stringent standards that were readily adopted in key countries, including the United States of America, post 2008.

But Misra, former vice president at the JP Morgan Chase, India, addressed a number of banks’ risk managers at the Four Points By Sheraton, Lekki, where he stressed the need for checks and balances in the data capturing process, as, according to him,  Nigerian banks require enough data, in terms of  “quantity and quality” to move into a particular approach of  guarding against financial (credit) and operational risks in line with the Basel II requirements.

He also harped on the fact that the said “checks and balances,” must begin even in the “feeding” process, and described management of change process, including that of mentality, as key issue.

Basel I, he noted, “does not lead to cultural change, but Basel II does,” thereby placing a demand on banks to “run awareness campaign at all levels,” as “regulators seek to embed cultural change.”

He listed the benefits of Basel II to include better quality of loan analysis and recovery, better turnaround time, uniformity in approach, lower default rate, better return from portfolios and lower operational losses, among others.

According to the Senior Risk Advisor,  full implementation of Basel II would lead to efficiency of capital, robust risk management process, higher profitability, improved processes and systems, as well as  better products and international recognition.

Industry sources told The Guardian that the apex bank — the CBN — had circulated document that would help the banks conduct internal stress tests ahead of the introduction of Basel II.

The Breakfast Session is, therefore, expected to set the stage for the effective takeoff of the project in Nigeria, even as Managing Director of H. Pierson Associates Ltd., Ms Eilean Shaiyen, gave the assurance that the session would run periodically.