Banking IT As the banking world gears up to face the practicalities of applying the Basel 2 standards to everyday business, one high street bank explains how it will tackle the change Barclays builds Basel-busting banking.
The latest international banking code is almost guaranteed to raise stress levels for both IT directors and chief executives in the banking industry.
The New Basel Capital Accord, a revised code for risk management commonly known as Basel 2, aims to make banks' assessments of their loans and investments more sensitive to risk, while reflecting technological developments in the global marketplace.
Banks that can show an advanced level of risk management should be able to reduce their capital and long-term costs. In other words, compliance with Basel 2 could give banks an edge over their competitors and become a central plank of business strategy.
The accord, unlike current regulations, will address requirements for information systems and is expected, for the first time, to require banks to set aside capital to cover operational risks.
Basel 2, which is due to be implemented by the end of 2006, has far-reaching implications for corporate IT systems. IT directors will have to link a maze of banking databases and reporting systems, update older applications and ensure that the information held in their systems is accurate.
Analysts estimate that banks will have to spend between £20m and £100m worldwide to comply with the requirements of Basel 2. They have also warned that banks have no time to waste, and urged them to begin preparing their IT systems to meet the 2006 deadline.
However, the revised code will be published as a European Commission directive and translated into UK legislation by city watchdog the Financial Services Authority.
Banks have remained tight-lipped about exactly how they will ensure that their systems meet the stringent criteria of the accord and how they are tackling such a large compliance project.
Now, however, Barclays Bank has spoken to Computer Weekly about its global Basel 2 project. It is understood to cost tens of millions of pounds, although Barclays has not put an exact figure on it, and span hundreds of credit and risk systems.
The early lessons of the project will also be of wider interest to the banking industry as it begins to grapple with the intricacies of technology and risk management.
Barclays' Basel 2 project is part a wider programme to ensure compliance with a raft of upcoming industry regulations, such as international accounting standards and the impact of UK entry into the euro, should it ever happen.
In 2001 Barclays commissioned an analysis which examined the requirements of Basel 2, as outlined in a 500-page document from the Basel committee, and how well-placed its own systems were to meet these targets. It is committed to achieving the most advanced level of compliance with Basel 2, which will add to the pressure on its IT department.
The analysis uncovered two main shortfalls. First, many of the existing IT systems had been built to meet regulatory requirements as they stood before Basel 2. Second, not enough customer data was captured from a single point - Basel 2 requires banks to hold at least five years' worth of historical data on their systems.
"We found that we had solutions in place but they were not terribly joined up with other systems," said Alan Hilton, Barclays head of credit risk research. "Basel 2 touches systems that have not previously been used for regulatory reporting, for example our credit rating system. We see this as a pretty gigantic data capture exercise from lots of systems." In response to the review Barclays began a series of compliance projects in its businesses.
The next challenge has been aggregating data from credit systems into different groups of risk (such as the possibility of a customer defaulting on a loan).
Basel 2 is not solely an IT issue, of course, and this is reflected in the team of Barclays executives who are overseeing the project. The steering committee, including Barclays' chief information officer David Weymouth, is responsible for the Basel project. Although the committee is headed by Barclays' group finance director and driven by the risk management department, IT staff still have an important role to play.
IT systems worldwide will have to be modified but the need for new systems will be limited for most areas of the business. By 2006 Barclays will begin to run new risk management systems and processes in parallel with the old system.
One area for new build, however, will be for calculating the "risk rating" of every asset the bank has, which will entail millions of calculations. Hilton describes the risk calculator technology as an "adding machine" that will be used in conjunction with Barclays' large existing datawarehouse and other risk systems.
With large, multi-discipline teams working on Basel 2 across the banking industry, the accord will challenge IT professionals to explain technical problems to business leaders in an engaging way. Those who succeed could see their career prospects greatly enhanced.
Are UK banks ready for Basel 2?
- Nearly 80% of UK banks said they had started a Basel 2 project, according to research conducted last year by KPMG
- Seventy per cent of UK banks said they had started work on credit risk issue (compared with 63% last year)
- The number of banks that are undecided as to how they reflect credit risk has fallen significantly, from 24% in 2001 to 8% in 2002
- Only 11% of respondents worldwide said that they had not started a Basel project of any kind.