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Monday, 18 August 2008

Basel II - A Powerful Tool To Enhance Long-term Resilience & Competitive Advantage

KUALA LUMPUR, Aug 18 (Bernama) -- The implementation of Basel II, which are recommendations on banking laws and regulations issued by the Basel Committee on Banking Supervision, is a powerful tool for banks to significantly enhance both long-term resilience and competitive advantage, said Bank Negara Malaysia Governor, Tan Sri Dr Zeti Akhtar Aziz.

Basel II, promises greater financial stability through the closer alignment of risk with capital, she said in her keynote address at the Fourth SEACEN /ABAC/ABA/PECC Public-Private Dialogue for the Asia Pacific Region here.

"To realise the full benefits from the implementation of Basel II, its multi-faceted dimensions need to be well understood and integrated with the financial structures, institutional practices, and supervisory systems," she added.

She also said emerging markets in particular would need to ensure that supervisory interpretations of the framework are contextualised to local conditions, and the pre-conditions for its effective implementation are adequately developed to avoid potential market distortions.

"At the institutional level, Basel II provides a unique opportunity for banks to integrate risk considerations with their business strategies.

"Indeed, several leading financial institutions have successfully taken Basel II beyond the narrow and mechanistic risk applications to a more strategic implementation of the framework across the organisation," she highlighted.

According to Zeti, such institutions have leveraged on the upgraded risk infrastructures that have been established for Basel II to create competitive advantages through the application of new business and management tools.

"This enables the risk function to have a central role in forming strategic moves into new markets or products. In the process, this will ensure that the strategies are aligned with the banks risk appetite and policies," she said.

She however added that the benefits of Basel II could not be achieved with just a strict regulatory compliance approach.

"While Basel II serves as a powerful catalyst to reposition the role of, and the attention to of risk management in banking institutions, significant efforts too need to be directed at strengthening the financial structure, corporate governance, risk management and data capabilities," she said.

In the Asia Pacific region, thirteen countries have adopted the standardised approaches under Basel II for credit and operational risks.

A number of countries have either already adopted or announced plans to embrace the more advanced approaches by 2010 or earlier.

Malaysia adopted the standardised approach this year and recently issued a concept paper detailing the parameters for the implementation of the more advanced approach in 2010.

Zeti said in the wake of the sub-prime mortgage crisis in the United States, several aspects of Basel II have attracted attention such as the use of ratings in the regulatory framework and whether this has unintentionally discouraged investors from performing their own due diligence.

"The underestimation of risk for structured credit securitisations has now come under greater scrutiny.

There has also been increased debate over the cyclicality impact of Basel II," she added.

For emerging economies, Basel II has arguably a more far reaching impact as the economies continue to depend heavily on the banking system to finance economic activity.

Zeti explained that with a few exceptions,commercial banks are the main providers of credit in most emerging economies, accounting for an average of 90 percent of total credit.

"This produces a higher correlation to the economic sectors where the implications on the banking system could result in significant disruptions to credit supply which could in turn affect economic activity," she pointed out.

In Malaysia, Zeti said the financial reforms undertaken were to strengthen the underpinnings of the banking system which are instrumental in facilitating the smooth transition to the adoption of Basel II without adverse market outcomes.

-- BERNAMA

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Alfalah Consulting - KL: www.alfalahconsulting.com 
Islamic finance consultant: www.ahmad-sanusi-husain.com 
Islamic Investment Malaysia: www.islamic-invest-malaysia.com

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